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Industry and Competitive Analysis

“You do not have to do this; survival is not compulsory.” – W. Edwards Deming

A business firm’s strategy is affected by the structural


characteristics of the industry. It is thus considered essential for a
firm to make an elaborate analysis of the industry in which the firm
operates its business. Based on Michael Porter’s research results,
an industry structure consists of suppliers, buyers, direct
competitors, new entrants and substitutes. The strategy-makers of
a firm need to be concerned with the impact of the industry The strategy-makers of a
structure on the firm’s strategy. Once the external environmental firm need to be concerned
analysis has been completed, they should embark upon industry with the impact of the
industry structure on the
analysis. Industry analysis helps them have clear information about
firm’s strategy.
what is happening in the industry in which their companies are
operating their businesses. Since industry contains competition, its
analysis brings to light the complexities of the competition and the
consequent challenges facing the industry. This chapter discusses
the elements of industry environment, how competition in the
industry can be analyzed, and also how the ‘industry analysis’ as a
whole (overall industry analysis) can be undertaken. Specifically,
this chapter deals with the following:

• Concept of industry and industry environment


• Importance and elements of industry environment
56 Strategic Management / Dr. M A Mannan

• Significance of industry and competitive analysis


• How to analyze competition in an industry
• How to conduct overall industry and competitive
analysis
• Preparing an industry analysis plan
4.1 Concept of Industry
In general, we can define industry as a group of firms offering
products or services that are close substitutes for each other. The
We can define industry as products satisfy the same basic consumer needs. According to
a group of firms offering
products or services that
Thompson and Strickland, an industry is a group of firms whose
are close substitutes for products have so many of the same attributes that they compete for
each other. the same buyers. Byars, Rue and Zahra defined industry as a
group of companies that offer products, goods or services that
satisfy similar customer needs.1 For example, laundry bar soap and
detergent powder are close substitutes for each other. The soap
manufacturers are in the same basic industry as the companies
that manufacture detergent powder. Both of these products serve
the same consumer need – the need of washing clothes.

4.2 The Industry Environment


Also known as ‘immediate operating environment,’ the industry
environment is really the competitive environment of a business
organization. Industry environment substantially affects a firm’s
business operations, because it is the ‘immediate’ external
An organization has environment of the firm. Every firm operates its business in an
greater control over the industry and therefore its activities are directly affected by any
industry environmental change in the industry environment.
factors than the general
environmental factors. Changes in the general environment can have direct impact on any
of the factors in the industry environment. An organization has
greater control over the industry environmental factors than the
general environmental factors. One point is to be noted that
although the industry environment affects all the firms in the
industry, in reality, all firms are not affected equally.

4.3 Elements of Industry Environment


As already said, several factors constitute industry environment
Several factors constitute
industry environment such such as suppliers, customers, competitors (existing and potential),
as suppliers, customers, new entrants and substitute products. You will have detailed ideas
competitors (existing and about these factors from the following discussions.
potential), new entrants
and substitute products. Suppliers: Suppliers are sources of resources such as raw
materials, components, equipment, financial support, services, and
office supplies. In order to ensure long-term survival and growth of

1
It is not that easy to provide a clear definition of industry. “The boundaries of an
industry are indistinct, fuzzy, and often permeable. Where is the boundary between
communication, entertainment, publishing, computing? Is Sony in competition with
News Corporation?” See Fitzroy and Hulbert, op. cit., p. 77.
C H A P T E R 4 Analysis of Industry and Competition 57

a company, it is essential to develop a dependable relationship


between a business-firm and its suppliers. In relation to its
competitive position with suppliers, a company should address the
following questions.2
 Are suppliers’ prices competitive? Do suppliers offer
attractive quantity discounts? How costly are their shipping
charges?
 Are vendors competitive in terms of production
standards?
 Are suppliers’ abilities, reputation, and services
competitive?
 Are suppliers reciprocally dependent on the firm?
Customers: Strategy managers must understand the composition
of the company’s customers. With this end in view, they need to
develop an exhaustive customer profile of both the present and
potential customers. Managers will be in a better position to
pragmatically plan the firm’s strategic operations, anticipate
changes in the size of the markets and anticipate demand patterns.
While constructing a customer profile, managers need to use
information regarding geographic location of customers,
demographic characteristics of buyers, psychographic issues and
buyer behavior.
Competitors: A firm needs to analyze the competitive intensity in
the industry. It needs to understand the competitive position in the
industry in order to improve its chance of designing winning A competitor profile may
strategies. Many companies develop a ‘competitor profile’ to more include such variables as
accurately forecast its short-and-long-term growth and profit market share, product
potentials. A competitor profile may include such variables as line, effectiveness of sales
market share, product line, effectiveness of sales distribution, price distribution, price
competitiveness,
competitiveness, advertising and promotion effectiveness, location
advertising and promotion
and age of facility, production capacity, raw material costs, financial effectiveness, location and
position, etc. age of facility, production
capacity, raw material
New Entrants: The new entrants are the potential competitors of costs, financial position,
the firm. They are potential competitors because if they enter into etc.
the industry with the similar types of products, the competitive
intensity will increase.
Substitute Products: The producers of substitute products are
indirect competitors. The substitute products serve the same
categories of customers. They can meet the similar needs of
customers, and therefore, emerge as threats. For example, when
detergent powder is capable of meeting customer needs in a much
better way or even in the same way as the laundry soap does,
detergent powder becomes strong indirect competitor of laundry
soap.

2
John A. Pearce and Richard B. Robinson, Strategic Management (Homewood, Illinois:
Richard D. Irwin, 1985), p. 112.
58 Strategic Management / Dr. M A Mannan

4.4 Industry and Competitive Analysis: Why Is It


Important?
Industry is the ‘container’ of competition. The strategy-makers must
understand the competitive intensity in the industry. The
competitive intensity influences a company’s business operations
tremendously. Thus, it is absolutely essential for a company to
review the competitive intensity and fit its strategy to its industry
environment.

Good strategy-making No organizations can expect good strategy-making without a


should be preceded by detailed analysis of industry environment. That is why, it is widely
good industry and recognized that good strategy-making should be preceded by good
competitive analysis. industry and competitive analysis. Industry analysis provides
Industry analysis necessary information about the industry’s situations. From this
provides necessary
information about the analysis, managers can obtain information regarding many
industry’s situations. industry-related issues such as the following:
• Economic features of the industry like market size, number of
customers and sellers, technology, nature of standardization of
product, market growth potential, prospect of making profit etc.
• Strength of competition and competitive pressures.
• Major driving forces in the industry that cause pressures for
change.
• Financial and competitive positions of the competitors in the
marketplace.
• Strategies undertaken by the competitors.
• Industry’s key success factors such as design in garments
industry.
• Attractiveness of the industry in terms of growth prospect, degree
of uncertainty in the future.

With these data, managers can achieve several purposes:3


1. Identifying and selecting the company’s arena by defining its
industry and served markets.
2. Identifying business opportunities and uncovering niche markets.
The most widely used 3. Providing a benchmark for evaluating the company relative to the
model for an industry’s competitors and, based on it, developing skills and capabilities
competition analysis is
necessary for success.
Michael Porter’s Five
Forces Model. Managers 4. Shortening the company’s response-time to competitors’ moves.
can use this model to 5. Restricting or preempting competitors’ moves.
analyze the competitive 6. Encouraging organizational development through frequent
environment in the interactions among the executives during the analysis.
industry in which their 7. Helping the company to gain a competitive advantage through
company is operating its identifying any area where the company holds a significant
business. advantage over its rivals.
8. Enhancing organizational learning by exposing managers to the
ideas and actions of their competitors.

3
J. E. Bain, Barriers to New Competition, (Cambridge, Mss: Harvard University Press,
1956. Quoted in C. W. L. Hill and G. R. Jones, Strategic Management (Boston:
Houghton Mifflin Company, 2000).
C H A P T E R 4 Analysis of Industry and Competition 59

9. Providing invaluable insights into the industry and competition,


which help managers identify appropriate strategy and implement
strategy successfully.

4.5 How to Analyze Competition in an Industry?


Managers in a firm/company can use various models for analyzing
the industry environment. However, the most widely used model for
an industry’s competition analysis is Michael Porter’s Five Forces
Model. Managers can use this model to analyze the competitive
environment in the industry in which their company is operating its
business. The Five Forces Model provides a framework to identify
industry-related opportunities and threats. We discuss this model
here in details.

Michael Porter’s Five Forces Model of Competition


Porter has developed a framework that managers can use to
analyze competitive forces in the industry’s environment. It helps
them identify the industry-related opportunities and threats
confronting their company. A look at the Five Forces Model that
appears in Figure 4.14 would enable you to have a broad view of
the elements of the model. You will find that there are five factors or
forces that shape competition in an industry. These are: (i) threat of
new entrants; (ii) bargaining power of suppliers; (iii) bargaining
power of buyers; (iv) threat of substitute products; and (v) rivalry
among the existing firms.

Threat of new entrants

Bargaining Bargaining
Rivalry among the
power of power of
existing firms
suppliers buyers

Threat of substitute
products

Figure 41: Michael E. Porter’s Five Forces Model


4
Michael Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review
(March-April, 1979).
60 Strategic Management / Dr. M A Mannan

We provide here a discussion on the impact that the individual


forces in the industry can have on a firm within the industry.
1. Threat of New Entrants

Potential competitors
Threat of new entrants refers to the risk of new entry by potential
create threats to competitors. In the marketplace some competitors are already
existing companies operating their businesses. They are called existing competitors.
(incumbent companies) Some other upcoming competitors are not now operating business
because if they enter in the industry but they can enter into the industry if they have the
they can make
competition tougher
capability and desire to enter. They are potential competitors.
through taking away Bangladesh Telephone and Telegraph Board (BTTB) was once
market share from the considered a potential competitor in the cellular phone industry. In
existing companies. fact, BTTB (subsequently renamed as BTCL) entered into the
industry with its cheaper mobile phones in April 2005, although it
could not initially manage the market-situation well.
Potential competitors create threats to existing companies
(incumbent companies) because if they enter they can make
competition tougher through taking away market share from the
‘Barriers to entry’ are
created by undertaking existing companies. Thus, existing companies discourage potential
some measures that are competitors from entering into the industry by creating barriers to
very costly for the entry. ‘Barriers to entry’ are created by undertaking some
competitors to adopt. measures that are very costly for the competitors to adopt. Such
Such barriers may be barriers may be strong brand loyalty, absolute cost advantage,
brand loyalty, absolute
cost advantage, sizable economies of scale, high capital requirements, difficulties of
economies of scale, and building distribution network of distributors and retailers, restrictive
government regulations tariffs, international trade restrictions, and government regulations.5
On the other hand, if the risk of entry by potential competitors is
low, the existing companies can raise prices and earn higher
profits. When entry barriers are low, it is easy for potential
competitors to enter the industry. Despite entry barriers, many
entrants enter the industry with appealing products. The strategy-
makers need to identify the entrants, monitor their strategies and
tactics, undertake counter-strategy, and deal with the emerging
issues building on the firm’s existing resources and capabilities.
2. Bargaining Power of Suppliers
Suppliers have very
little or no bargaining A company has to procure various types of ‘supplies’ from the
power if the materials suppliers such as raw materials, components, parts and other
they sell are available materials necessary for producing a product. When dependency of
from different parties. the customers (buyer-firms) is high, the bargaining power of
Their power increases if
the supply of the
suppliers is enhanced. Powerful suppliers can raise prices of
materials is limited or if materials. As a result, powerful suppliers are a threat to the
the materials are such companies who have to buy at that price. If suppliers are weak,
that they are inevitable company may be in an advantageous position and can demand
for the company.
5
See J. E. Bain, Barriers to New Competition (Cambridge, Mass: Harvard University
Press, 1956); C.W.L. Hill and G.R. Jones, Strategic Management (Boston: Houghton
Mifflin Company, 2000); and Thompson et al., Crafting and Executing Strategy (New
Delhi: Tata McGraw-Hill, 2010).
C H A P T E R 4 Analysis of Industry and Competition 61

high quality at a lower price from the suppliers. In the paper


industry in Bangladesh, the number of suppliers is very few and
they are very strong in bargaining prices. This has created a threat
for the publishing industry. However, this threat has been to some
extent diluted due to imported paper. Suppliers have very little or
no bargaining power if the materials they sell are available from
different parties. Their power increases if the supply of the
materials is limited or if the materials are such that they are
inevitable for the company (buyer). For example, in the PC market
Intel is the most powerful because of its unique position in
producing microprocessor (Pentium).
According to Michael Porter, suppliers are most powerful:6
• When the product that they sell has few substitutes and is important
to the company.
• When the company’s industry is not an important customer of theirs.
In such instances, the supplier’s health does not depend on the
company’s industry, and suppliers have little incentive to reduce
prices or improve quality. Buyer’s bargaining power
becomes high when
• When their respective products are differentiated to such an extent suppliers have to depend
that it is costly for a company to switch from one supplier to another. on them for some reasons.
In such cases, the company depends on its suppliers and cannot play On the other hand, their
them off against each other. bargaining power is weak
when suppliers/sellers are
• When, to raise prices, they can use the threat of vertically integrating capable to raise prices.
forward into the industry and competing directly with the company.
• When buying companies cannot use the threat of vertically integrating
backward and supplying their own needs as a means to reduce input
prices.

The bargaining power of suppliers is weaker under the following


circumstances in the industry:
• When substitute products acceptable to the buyers are easily
available.
• When huge quantity of products are available in the market.
• When buyers can buy from alternative suppliers at a low cost.
• When buyer-firms have the capacity to integrate backward into the
business of the supplier and thus can satisfy the customer’s own
requirements.
• When the customers have ample opportunities to develop
strategic alliance with other suppliers, and thus can have win-win
gain.
• When continued large purchases on the part of the customers is
important for the suppliers.

6
Adopted from Charles W. L. Hill and Gareth R. Jones, Strategic Management (Boston,
MA: Houghton Mifflin Company, 2000, p. 82).
62 Strategic Management / Dr. M A Mannan

• The customers can buy the same products from many suppliers at
the same price.

3. Bargaining Power of Buyers


Buyers of products may be ultimate consumers or even the
intermediaries such as dealers, wholesalers and retailers. Buyer’s
bargaining power becomes high when suppliers have to depend on
them for some reasons. On the other hand, their bargaining power
is weak when suppliers/sellers are capable to raise prices. Whether
buyer-seller relationships represent a weak or strong competitive
force depends on whether buyers have sufficient bargaining power
to influence the terms and conditions of sale in their favor, and the
extent of seller-buyer strategic partnerships in the industry.7
According to Porter, buyer’s bargaining power is highest when:
• The supply industry is composed of many small companies
and the buyers are few in number as well as they are large.
• Buyers purchase in large quantities.
• The supply industry depends on the buyers for a large
percentage of its total orders.
• Buyers can switch orders between supply companies at a
low cost.
• It is economically feasible for the buyers to purchase the
input from several companies at once.
• Buyers can use the threat to supply their own needs
through vertical integration (backward linkage) as a device for
forcing down prices.

Buyer’s bargaining power is generally weaker –

• When buyer depends on the seller because of the fact that the
brand reputation of the seller is very important to the buyer.
• When there is high demand for the seller’s products in the market
and as a result, a ‘sellers’ market’ prevails in the industry.
• When cost of procuring products from alternative sources is very
high.
• When buyer purchases a particular product from the seller in small
quantity or does not purchase frequently.

4. Threat of Substitute Products


A company needs to consider the competitive pressures from
substitute products. The substitute products may come from either
A company needs to
consider the the same industry or from other industries. For example, cotton
competitive pressures producers are in direct competition with the producers of polyester
from substitute fabrics. Newspapers compete against television in providing latest
products. The substitute news. E-mail is a substitute for the overnight delivery of documents
products may come
by the courier service companies. Coffee is a substitute of tea.
from either the same
industry or from other 7
A. A. Thompson and A. J. Strickland, Strategic Management (Boston: McGraw-Hill
industries. Irwin, 2001).
C H A P T E R 4 Analysis of Industry and Competition 63

Bottled water is a substitute of juice and soft drinks. Plastic bottles


are substitutes of aluminum cans for beverages. Traditional film
cameras are fighting hard against their substitute-enemy – the
digital cameras.
If the buyers view the substitute products as ‘good substitutes’,
competitive pressure automatically emerges from the actions of the
companies producing substitute products. For example, “Lasik
operation (laser surgery) of eyes has created a strong competitive
pressure on the produces of eye-glasses and contact lenses.
Similar is the situation between VCRs/video tapes and DVD
players, and between landline telephones and mobile phones.
The major factors that determine the strength of the competition
from substitutes are (a) attractiveness of the prices of substitutes;
(b) buyers’ satisfaction with the substitutes in terms of quality and
other features; and (c) the easiness to switch to substitutes. When
the substitutes are available at cheaper prices, the producers of the
normal product are in a high competitive pressure to reduce prices.
When substitute products are available, customers begin to
compare prices, quality etc. with the normal products. Similarly,
when switching costs from the normal product to substitute
products are low (and also not inconvenient), buyers become more
prone to the substitutes.
Thompson et al. have indicated three signs that point to a strong
competition from substitutes. These are: (a) sales of substitutes are
growing faster than sales of the industry; (b) producers of
substitutes are moving to add new capacity; and (c) profits of the
producers of substitutes are on the rise.
Existence of substitute products in the industry poses a threat to a
company. Thus, the company’s profit is likely to depress due to
cutting down prices. If a company has few substitutes, it has the
opportunity to raise prices and thereby increase profits.

5. Rivalry Among the Existing Firms


A very important force in the Porter’s Model is the extent of rivalry When competition is
among the established firms in the industry. In an environment of strong, the industry may
face severe price-war in
weak rivalry (competition), a firm can raise prices and make higher which firms compete
profits. When competition is strong, the industry may face severe against each other on
price-war in which firms compete against each other on the basis of the basis of price cuts.
price cuts. If there is a severe competition among the firms in the
industry, profitability decreases substantially. Thompson and
Strickland regard this force of rivalry as the ‘strongest of the five
forces.’
Inter-company rivalry or competition stems from several factors, as
identified by Porter in his famous book Competitive Strategy. These
are as follows:8
8
Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (New York: Free Press, 1980).
64 Strategic Management / Dr. M A Mannan

• Competition increases as the number of competitors


increases.
• Competition is usually stronger when demand for the
product is growing slowly.
• Competition is more intense when industry conditions
encourage competitors to cut prices.
• Competition is stronger when customers’ costs to switch
brands are low.
• Competition is stronger when one or more competitors are
dissatisfied with their market position and undertake other measures
to win the battle for market share.
• Competition tends to be more intense when it costs more
to get out of a business than to stay in the industry.
• Competition becomes more volatile when competitors are
diverse in their objectives, strategies resources, etc.
• Competition increases when powerful companies from
outside the industry acquire the weak companies in the industry and
launch aggressive campaigns to make the acquired companies
profitable.

4.6 Why Do Managers Widely Use Porter’s Five


Forces Model?
Managers can use this model to systematically diagnose the
principal competitive pressures in a market. With this model they
can assess the strength of each of the competitive forces. They can
The major reason behind
the wide use of his
further understand how important each of these forces is. The
technique is that it is easy major reason behind the wide use of this technique is that it is easy
to understand and apply to understand and apply in practice when mangers analyze
in practice when mangers competition. Mangers find it comfortable to analyze the competitive
analyze competition. pressures associated with each force in the model. They can
clearly determine whether the pressures of the five competitive
forces exert any strong or weak influence in the market place.
Based on their understanding of the interplay of these forces, they
can strategically think about the right type of strategy for their
company.
Michael Porter’s model has several management implications:
1. It reveals most important strategic clues in an industry’s
competitive environment. These are strengths of each of the five
forces, nature of the competitive pressures of each force, and
A strong competitive
the overall structure of competition in the industry.
force can be regarded 2. Profit margins for all competing firms become thin if the
as a threat since it suppliers and buyers have considerable bargaining leverage,
depresses profits. A competition among sellers is strong, low entry barriers allow
weak competitive force companies to enter easily into the industry, and competition
can be viewed as an
opportunity, for it allows
from substitutes is strong. The opposite happens when the
a company to earn competitive forces are not collectively strong.
greater profits. 3. Porter argues that the stronger each of these forces is, the
more limited is the ability of established companies to raise
prices and earn greater profits. A strong competitive force can
C H A P T E R 4 Analysis of Industry and Competition 65

be regarded as a threat since it depresses profits. A weak


competitive force can be viewed as an opportunity, for it allows
a company to earn greater profits. The strength of the five
forces may change through time as industry conditions change.
The manager’s task is to study how changes in the five forces
give rise to new opportunities and threats. His/her next task is to
formulate appropriate strategic responses. Manager’s strategy-
making task becomes easier when he/she can gauge the
competitive insights from the analysis of the five forces. The
information from the analysis of five forces helps managers
formulate winning strategy that can ensure the company a
sustainable competitive advantage.
Porter’s Model has major drawbacks as a tool for competition
analysis. It can be used for analyzing only the degree of
competition in the industry. It cannot explore such factors as the
influential economic factors in the industry that are relevant to
managerial strategy-making. It also fails to identify the driving
forces – major causes of changing industry conditions. This model
is not very suitable to assess the competitive position of rivals and
their likely strategic moves, and overall industry attractiveness.
These drawbacks can be overcome by using Thompson and
Strickland’s ‘Seven Factors Model of Industry Analysis.’

Industry and Competitive Analysis:


Thompson and Strickland’s Seven Factors Model

4.7 The Focus of Thompson and Strickland’s Model


Michael Porter’s Five Forces Model focuses only on the competitive
forces surrounding buyers, suppliers, established companies,
potential competitors and substitute products. This model excludes
many other industry-related factors that substantially provide inputs
for identification of industry’s environmental opportunities and Thompson and
threats. To overcome this shortcoming of Porter’s Model, Strickland have
Thompson and Strickland have developed a model for the overall developed a model for
analysis of an industry, including competition within the industry. the overall analysis of
The model for industry and competitive analysis proposed by an industry, including
competition within the
Thompson and Strickland has not only been able to overcome the industry.
drawbacks of Porter’s Model, it also seems to be comprehensive. It
touches on all the relevant issues in an industry that need to be
analyzed for assessing the overall industry situations, including the
degree of competition in the industry.
This model is based on seven forces. It provides a comprehensive
treatment for the analysis of the issues in an industry. It focuses on
dominant economic characteristics of an industry, sources of
competitive pressures, strengths of the competitive forces in the
industry, driving forces, market position of the competitors, strategic
66 Strategic Management / Dr. M A Mannan

moves (actions) undertaken by competitors, the key success


factors in the industry, and the overall attractiveness of the industry.

4.8 The Essence of Thompson and Strickland’s Model


The seven factors of the Thompson and Strickland Model are as
follows:9

1. Industry’s dominant economic features.


2. Main sources of competitive pressure and the strengths of
the competitive forces.
3. Driving forces.
4. Market position of the rival companies.
5. Competitor’s strategic moves.
6. Industry’s key success factors.
7. Industry’s overall attractiveness and profitability prospects.

An analysis of these factors reveals competitive structure of the


industry. Let’s discuss the factors one by one. The information
generated through the analysis of these factors would build
understanding of a firm’s surrounding environment and form the
basis for matching strategy to changing industry conditions and
competitive forces.

 Dominant Economic Features of the Industry


An industry’s economic features are important because their
An industry’s economic implications for strategy making are great. Economic features of an
features are important industry generally include: market size; scope of competitive rivalry
because their (local, regional etc); market growth rate and position; stage in life
implications for strategy cycle (early development, rapid growth and takeoff, decline and
making are great.
decay etc); number of companies in industry; number of customers;
extent of backward linkage or forward linkage (i.e., degree of
vertical integration in the industry); ease of entry into the industry;
ease of exit from the industry; types of distribution channels; level
of differentiation of competitors’ products; technology/ innovation;
opportunities to realize economies of scale by the companies;
capacity utilization; and industry profitability.
New developments take An industry’s economic features are relevant to managerial strategy
place in the industry making in various ways. Here are some examples. The strategic
because important
forces are always
importance of ‘market size’ is that small markets do not usually
driving the competitors, attract big competitors but big markets do it. The strategic
customers and importance of ‘entry barriers’ is that high barriers protect market
suppliers to alter their
actions. 9
This section draws on Thompson and Strickland, op.cit. pp. 74-113.
C H A P T E R 4 Analysis of Industry and Competition 67

position and profits of existing firms, and low barriers invite more
and more potential competitors to enter into the industry. Similarly,
big capital requirements create barriers to entry of potential
competitors.
 Sources of Competitive Pressures and Strengths of
Competitive Forces
An important component of industry analysis is sources of
competitive pressures and the strengths of each competitive force.
An understanding of the competitive character of the industry helps
managers develop successful strategy. Thompson and his
colleague suggested the use of Michael Porter’s Five Forces Model
for the analysis of competitive pressures and the strength of each
force of competition. They are of the view that the state of
competition in an industry is a composite of five competitive forces
identified by Porter. As already discussed, the five forces are threat
of new entrants, bargaining power of suppliers, bargaining power of
buyers, threat of substitute products, and rivalry among the existing
firms.

 Driving Forces in the Industry


Economic characteristics say a very little about the ways in which
the environment may be changing because of new developments in
the industry. New developments take place in the industry because
important forces are always driving the competitors, customers and
suppliers to alter their actions. These forces in the industry are the
major underlying causes of changing competitive conditions in the
industry. These are called driving forces.
Environmental scanning
Depending on the nature of industry there may be various drivers of involves itself in
industry and competitive change. The driving forces create monitoring and studying
current events,
pressure on competitors, suppliers and customers to change their constructing scenarios
actions. They tend to change competitive conditions in the industry. and identifies the
Most of them originate in the industry environment, although driving driving forces.
forces are not uncommon in the general environment.

The most common driving forces are changes in the long-term


industry growth rate, changes in buyer demographics, product
innovation, technological change, marketing innovation, entry or
exit of major firms, diffusion of technical know-how, increasing
globalization of the industry, changes in cost and efficiency,
emerging buyer preferences, government policy changes, changing
attitudes and life-styles etc.

Early detection of driving forces is possible through systematically


and regularly scanning the industry environment as well as other
external factors, known as Environmental Scanning. This
qualitative technique of investigating into external factors involves
itself in monitoring and studying current events, constructing
scenarios and identifying the driving forces. Many large companies
68 Strategic Management / Dr. M A Mannan

such as Coca-Cola, Motorola, and Shell Oil employ environmental


scanning on a continuous basis.

In any kind of industry in general, you can adopt the following steps
for the analysis of the driving forces:
• Scan the environment and identify the driving forces. You
need to identify the powerful driving forces that have
dramatic impacts and also less strong driving forces which
are specific to your industry but have moderate impacts.
• Examine the driving forces thoroughly and determine
whether and how they are influencing the industry
landscape, i.e., how they are making the industry attractive
or unattractive or less attractive. This step is about the
assessment of the impacts of the driving forces.
• Finally, develop strategy taking into account the impacts of
the driving forces. At this step, you will determine the
possible strategy adjustments that would be needed to deal
with the impacts of the driving forces.
There may be many forces of change in an industry but in reality all
of them do not qualify as ‘driving forces’. Managers need to
carefully evaluate the forces so that they can intelligently separate
the major changes from the minor changes. This would help
mangers formulate sound strategy. Driving-forces analysis is in
reality considered as having ‘practical value and is basic to the task
of thinking strategically about where the industry is headed and
how to prepare for the changes ahead’.10

 Market Position of the Competitors


Market position of competitors in the industry has a bearing on the
overall competition in the industry. Therefore, the strengths of
The competitors that competitive forces need to be analyzed. Such analysis is important
pursue similar strategic to discover the main sources of competitive pressures and how
approaches and have strong they are. Attempt is made to study the market position of
similar positions in the rival companies.
market constitute a
strategic group. One technique for revealing the competitive (market) positions of
industry participants is strategic group mapping. It is most useful
when an industry has so many competitors that it is not practical to
examine each one in depth. Strategic group mapping endeavors to
determine the strategic group for a product of a company. So,
naturally, the question arises: What is a strategic group?

10
Thompson et al., Crafting and Executing Strategy, 16th Edition, op. cit., p. 84.
C H A P T E R 4 Analysis of Industry and Competition 69

Strategic Group: Companies in an industry often differ with


respect to several factors: distribution channels, market segments,
quality of products, technological leadership, customer service,
pricing policy, advertisement policy and promotion policy, etc.
These differences lead to different groups consisting of a limited
number of companies in the same industry. The companies in the
same group are found to follow the same basic strategy, and some
follow a strategy different from the companies in other groups.
These groups are called strategic groups. The competitors that
pursue similar strategic approaches and have similar positions in
the market constitute a strategic group. For instance, although
Maruti car is in the automobile industry, it is not a competitor of
Civic Honda or Prado. Subaru is not competing with Mercedes-
Benz or BMW.

Figure 4.2 shows two main strategic groups in the pharmaceutical


industry - Proprietary Group and Generic Group. The companies in
the proprietary group invest huge amount of money in research and A company’s closest
development for producing a new product. They patent the new competitors are those in
its strategic groups, not
product and produce and sell it for several years (as per patent law those in other strategic
in the country) at high prices. This brings them high profits for many groups. A major threat
years until the patent term is expired. These companies are high- to a company’s
risk/high return companies, and are included in the proprietary profitability can come
group. On the other hand, the companies in the generic group are from within its own
strategic group.
low-risk/low return companies. They produce those products
(drugs) that were first invented by the proprietary group companies.
Therefore, their investment is low due to low R&D spending, and
risk is also low. Their returns are low because they charge low
prices for the generic drugs.

High

PROPRIETARY
GROUP
Company- A
Prices Company-B
Charged Company-C
GENERIC GROUP
Company-X
Company- Y

Low
Low R & D Spending High

Figure 4.2: Two strategic groups in the pharmaceutical industry

You will find resemblance in the companies in the same strategic


group in terms of:
 comparable product line breadth
 using same kind of distribution channels
70 Strategic Management / Dr. M A Mannan

 offering buyers similar services and technical assistance


 using essentially the same product attributes
 depending on identical technological approaches or
 selling in the same price/quality range.
The implications of strategic groups are:
a. A company’s closest competitors are those in its strategic groups,
not those in other strategic groups. A major threat to a company’s
profitability can come from within its own strategic group.
b. Porter’s five forces can all vary in intensity among different
strategic groups within the same industry.

 Strategic Moves of the Competitors


Strategic moves refer to strategic steps or actions undertaken by a
company. Every company must be informed of the strategic moves
of the competitors. Information about the competitors’ strategic
moves can be obtained through an analysis of their moves in a
systematic way. The analysis involves (i) identifying competitors’
strategies, (ii) analyzing the strategies, (iii) watching the actions of
KSFs include attributes the competitors, (iv) understanding their strengths and weak-
of the product, nesses, and (v) anticipating what moves they will make next. After
resources of the
scouting the competitors’ strategic moves, managers can decide
company, competitive
capabilities etc. about the appropriate counter-moves. They can plan their own
actions to defeat the competitors. It is simply impossible to
outcompete a competitor without monitoring their actions and
predicting their future moves.
Managers of a company can gather information about the
strategies of competitors by:
• Examining what the competitors are doing in the
marketplace;
• Monitoring what the management of the competing
companies is saying about their plans;
• Considering competitors’ geographical market arena,
strategic intent, market share objective and willingness to take
risks;
• Trying to understand whether competitors’ recent moves
are offensive or defensive;
• Directly visiting the competitors’ offices to get information
about prices, wage and salary levels, introduction of new
products, etc.;
• Pumping competitors’ representatives at trade
shows/exhibitions/ trade fairs; and
• Searching through garbage dumpsters outside
competitors’ offices (may be considered unethical, although not
illegal).

 Industry’s Key Success Factors


Strategists review the
overall industry There are certain factors in every industry that determine a
situation and develop product’s success in the market. These may include attributes of
reasoned conclusions the product, resources of the company, competitive capabilities etc.
about the relative
attractiveness or
unattractiveness of the
industry.
C H A P T E R 4 Analysis of Industry and Competition 71

These factors are called ‘key success factors’ (KSF). A sound


strategy incorporates industry key success factors. They are
prerequisites for industry success. That is why, all firms in the
industry must pay close attention to the KSF. For example, KSF in
the juice industry include: full utilization of juice-producing capacity
(to lower down costs), strong network of middlemen (to have a
wider distribution of products over a region or the country), unique
flavor and taste, etc. Even packaging can be a success factor if the
juice is targeted to young groups.
Key success factors usually vary from industry to industry. The
variations occur mainly because of changes in the driving forces
and competitive conditions in the industry. This warrants that the
managers of companies need to give careful attention to identifying
the major KSF and avoid the minor ones.

 Industry Attractiveness
Strategy-makers in a company must be able to give answer to the
question: “Is the industry attractive, and what are its prospects for
above-average profitability?” In order to answer to this question,
strategists review the overall industry situation and develop
reasoned conclusions about the relative attractiveness or
unattractiveness of the industry. The factors that they usually
analyze for assessing industry attractiveness include: An insight about the
overall industry
• industry’s growth potential
situations facilitates
• favorable or unfavorable impact by the prevailing driving forces effective and pragmatic
• competitive position of the company in the industry strategy-making.
• potential entry or exit of major firms
• stability and/ or dependability of demand
• possibility of competitive forces becoming stronger or weaker
• severity of problems/issues confronting the industry as a whole
• degrees of risk and uncertainty in the industry’s future.

4.9 Industry Analysis Plan


Industry analysis provides information about the industry situations
that help strategy-makers concentrate on strategic thinking and Industry analysis plan is
predicting the future of the industry. An insight about the overall a document that
contains information
industry situations facilitates effective and pragmatic strategy- about the competitive
making. On the basis of the above analyses, managers can forces in the industry.
prepare a document containing all the information related to the
competitive forces in the industry. We may call it ‘industry analysis
plan.’ From the format presented in Figure 4.3, you can understand
the types of information that are usually provided in the industry
analysis plan.
The industry analysis plan broadly includes such information as
economic features, sources of competition, driving forces, market
position, strategic moves of the competitors, attractiveness of the
industry in which the company is operating its businesses, and the
72 Strategic Management / Dr. M A Mannan

key success factors in the industry. Against each of these forces,


detailed information is provided that portray the entire picture of the
industry. The information in this plan helps the managers develop
appropriate strategies to deal with the competitive pressures
prevailing in the industry. It also serves as a database of the
industry-related information.

4.10 Concluding Remarks


After making an analysis of the industry environment, managers
have no reason to suffer from complacency. They cannot really
The next chapter deals make winning strategy unless they gather information regarding the
with SWOT analysis company’s internal situations and the general external
that helps in identifying environmental factors. In the industry analysis, managers look at
internal strengths and the industry-specific external environmental factors only. This
weaknesses and
external opportunities analysis provides only industry-related external opportunities and
and threats of an threats. But they cannot know about the general opportunities and
organization. threats that arise from the general economic environment, political
and legal environment, social and cultural environment, natural
environment and demographic environment. Against this backdrop,
we devote the next chapter to making SWOT analysis that helps in
identifying internal strengths and weaknesses and external
opportunities and threats of an organization.

Market size, growth potential, technology,


INFORMATION ABOUT vertical integration, number and sizes of
ECONOMIC FEATURES buyers and sellers, and so on
Status of competition among competitors,
SOURCES OF COMPETITION power of buyers and suppliers,
competition from substitutes, threat of
potential entry and so on.
Changes in long-term industry growth,
DRIVING FORCES globalization of competition in the
industry, product innovation, changing
buyer preferences, etc.
MARKET POSITION Market leaders, runner-ups, weak
companies, strategic group members.
STRATEGIC MOVES OF RIVALS Competitors’ strategic moves and intents,
whom to be watched and so on.
Product attributes, competencies,
KEY SUCCESS FACTORS capabilities and so on.
INDUSTRY’S Factors making industry attractive. Factors
OVERALL making industry unattractive, special industry
ATTRACTIVENESS problems, favorable or unfavorable profit
outlook.

Figure 4.3: A sample format for industry analysis plan


C H A P T E R 4 Analysis of Industry and Competition 73

TERMS USED
Industry
Industry analysis
Competition
Five Forces Model
Entry barriers
Potential competitors
Bargaining power
Substitute products
Competitive pressure
Driving forces
Strategic moves
Key success factors
Strategic group
Strategic group mapping

SAMPLE MULTIPLE CHOICE QUESTIONS


1. When a strategy-maker undertakes strategic analysis of his/her
organization, s/he generally makes an analysis of the organization through
classification of the analyses broadly into three. Which of the following
category of analysis in not included in his/her classification?
a. Analysis of internal environment
b. Analysis of virtual environment
c. Analysis of industry environment
d. Analysis of external environment
2. What would happen to industry competition when the number of
suppliers is much higher than an industry needs?
a. Suppliers would have much bargaining power
b. Suppliers’ bargaining power would diminish
c. Suppliers would charge higher prices for their materials
d. None of the above
3. Buyer’s bargaining power becomes high when
a. Suppliers have to depend on them for some reasons
b. The supply industry depends on the buyers for a large percentage
of its total orders
c. Buyers can switch orders between supply companies at a low
cost
d. All of the above
4. The strength of competition from substitutes emerges from
a. Attractiveness of the prices of substitute products
b. Buyers’ satisfaction with the substitutes
c. Easiness to switch to substitutes
d. All of the above
74 Strategic Management / Dr. M A Mannan

5. The five forces model of Michael Porter includes five major forces in an
industry. Which of the following is not a force in his model?
a. threat of the terrorists in the locality of the industry
b. threat of substitute products
c. threat of new entrants
d. bargaining power of buyers
e. rivalry among the existing firms

6. Managers in a company can use the Porter's Model to-


a. systematically diagnose the principal competitive pressure in a market
b. assess the strength of each of the competitive forces
c. further understand how important each of the five forces is
d. all of the above
e. none of the above.
7. Porter's model has several drawbacks that make it unsuitable for perfect
analysis of an industry. Which of the following is/are included in these
drawbacks?
a. it can be used only for analyzing the degree of competition in the
industry
b. it cannot explore such factors as the influential economic factors in the
industry that are relevant to managerial strategy-making
c. it fails to identify the driving forces
d. all of the above are true
e. none of the above are true
8. There are certain factors in every industry that determine a product's
success in the market. These may include-
a. attributes of the product
b. resources of the company
c. competitive capabilities
d. all of the above
e. none of the above
9. In the juice industry, some of the key success factors (KSF) are-
a. full utilization of juice-producing capacity
b. strong network of middlemen
c. packaging with attractive features
d. all of the above
e. none of the above.

SAMPLE TRUE/FALSE STATEMENTS


# T/F Statements
1 Early detection of driving forces is possible through systematically
and regularly scanning the industry environment.
2 The state of competition in an industry is a composite of five
competitive forces identified by Porter.
3 A strategic group is a group of competitors who are in strategic
alliance.
4 The key success factors in the various industries do not vary because
the driving forces in all industries are same.
5 Since an industry’s economic features do not affect a company in that
industry, it is a futile exercise to examine the economic features of the
industry for the purpose of strategy making.
6 A company’s internal weaknesses may relate to valuable physical
assets, fruitful alliances, strong competitive capabilities and robust
C H A P T E R 4 Analysis of Industry and Competition 75

growth in profitability.
7 The factors that constitute industry environment are political
situations, technological factors, demographic situations, economic
conditions, etc.
8 An organization has greater control over the industry-related
environment than the general environmental factors.
9 Strategic mangers need to monitor developments in technology for
their particular industry when formulating strategy that might help
them avoid obsolescence and promote innovation.
10 There are competitors in an industry who are not now competing but
they can enter into the industry if they have the capability and desire
to compete. They are called existing competitors.
11 If the suppliers in an industry are powerful they can raise prices of
materials and as a result, powerful suppliers are a threat to the
companies who have to buy at that price.
12 In an industry, the key success factors usually remain static from
industry to industry and the static conditions occur mainly because of
changes in the driving forces.

SAMPLE SHORT-ANSWER QUESTIONS


1. You know that software industry in Bangladesh is an emerging industry.
Competition is gradually growing in this industry. What actions could your
firm take to create barriers of entry to this industry?
2. If your company is facing severe competition from substitute products,
what actions would you adopt to retaliate aggressively against new entrants
in the industry?
3. Define industry from the standpoint of strategic management. Cite a few
examples of industry existing in Bangladesh.
4. Why is industry analysis necessary? Managers of a company can obtain
information regarding many industry-related issues through industry
analysis. What are those issues?
5. What is the most widely used model for the analysis of an industry’s
competition? Explain the various forces of this model.
6. Explain Michael Porter’s Five Forces Model of competition analysis.
7. Why is the Porter’s Five Forces Model a widely used technique for an
industry’s competition analysis?
8. What are the strategic implications of the Porter’s Model of Competition
Analysis?
9. Discuss the methods for the analysis of an industry.
10. What are the dominant economic characteristics of an industry?
11. State the main sources of competitive pressures.
12. Define driving force and discuss the major driving forces in the
industries.
13. What is the importance of evaluating the market position of competitors?
14. Define strategic group and explain the procedure for constructing a
strategic group map.
76 Strategic Management / Dr. M A Mannan

15. Why should a company assess the strategic moves of the competitors in
the industry?
16. What are the key success factors in an industry? Explain your answer
with examples from the jute industry in Bangladesh.
17. How can you evaluate the attractiveness of an industry?
18. Prepare a sample industry analysis plan for the industry in which
company is operating its business.

PRACTICE QUESTIONS

1. Prepare the strategic group for your firm, which is doing business in the
textile industry. What factors would you consider for strategic group
mapping?
2. If your company is operating its business in the pharmaceutical industry,
and if you want to know the key success factors in the industry, what would
you do to identify the key success factors in the industry?

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