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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
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
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
Bargaining Bargaining
Rivalry among the
power of power of
existing firms
suppliers buyers
Threat of substitute
products
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
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.
• 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.
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.
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
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
High
PROPRIETARY
GROUP
Company- A
Prices Company-B
Charged Company-C
GENERIC GROUP
Company-X
Company- Y
Low
Low R & D Spending High
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.
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
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
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.
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?