CHAP 3 Industry analysis: the fundamentals

AT THE CORE OF THE MACRO ENVIRONMENT IS THE INDUSTRY ENVIRONMENT

government
and politics

the natural
environment

demographic
structure

technology

The industry
environment:
suppliers ;
competitors ;
customers

the national
international
economy

social
structure

The macro environment IMPACTS the firm through its EFFECT on the INDUSTRY
ENVIRONMENT
THE DETERMINANTS OF INDUTRY PROFITABILITY
3 KEY influences:
- The VALUE of the product to customers
- The INTENSITY of competition
- Relative bargaining power at different STAGES OF THE VALUE CHAIN.
THE SPECTRUM OF INDUSTRY STRUCTURES

Concentration
Entry and Exit
barriers
Product
differentiation
Information

Perfect
competition
Many firms
No barriers
Homogeneous
product
Perfect
information

OLIGOPOLY

DUOPOLY

A few firms
2 firms
Significant barriers
Potential for product differentiation
Imperfect availability of information

MONOPOLY
1 firm
High barriers

PORTERS 5 FORCES OF COMPETITION FRAMEWORK

THREAT OF SUBSTITUTES: Extent of COMPETITIVE PRESSURE from producers

of substitutes
THREAT OF NEW ENTRY: Entrants threat to INDUTRY PROFITABILITY depends
on the height of barriers to entry.
BARGAINNING POWER OF BUYERS/SUPPLIERS: the extent to which
BUYERS/SUPPLIERS are able to DEPRESS PROFITABILITY in an industry.
RIVALRY BETWEEN ESTABLISHED COMPETITORS

It is the extent to which INDUSTRY PROFITABILITY is DEPRESSED by AGGRESSIVE

PRICE COMPETITION depends upon:
-CONCENTRATION (number and size distribution of firms)
- DIVERSITY of competitors (differences in goals, costs strategies)
- PRODUCT DIFFERENTIATION
- EXCESS CAPACITY and EXIT BARRIERS
- COST CONDITIONS ratio of fixed to variables costs and extent of scale economies

APPLYING 5-FORCES ANALYSIS TO FORECAST INDUSTRY PROFITABILITY AND

DEVELOP STRATEGY

FORECASTING industry profitability if you can FORECAST CHANGES in industry

structure, you can PREDICT impact on COMPETITION and PROFITABILITY.
STRATEGY POSITIONING: once you know which structure features of the industry
support profitability and which depress profitability, you can choose a FAVORABLE
POSITIONING within the industry
STRATEGIES TO IMPROVE INDUSTRY PROFITABILITY
DRAWING INDUSTRY BOUNDARIES

Key criterion: SUBSTITUTABILTY

- on the DEMAND side: buyers are willing to SUBSITUTE between types of cars and
across countries
- on the SUPPLY side: manufacturers are able to SWITCH production between types
of cares and across countries
NEED to DRAW industry boundaries DIFFERENTLY for DIFFERENT types of decision
IDENTIFYING KEY SUCCESS FACTORS
PRE-REQUISITES FOR SUCCESS:
- What do CUSTOMERS want? ANALYSIS OF DEMAND
- How does the firm SURVIVE competition? ANALYSIS OF COMPETITION
= KEY SUCCESS FACTORS
SUMMARY
-

From environmental analysis to industry analysis: the industry is the CORE of a

firms external environment. Political, economic, social and technology forces impact
the firm through its industry.
FORECASTING industry PROFITABILITY: past profitability = poor indicator for
future BUT if you can FORECAST CHANGES in industry structure, you can
PREDICT likely impact on COMPETITION AND PROFITABILITY.
Strategies to improve industry profitability = influence industry structure by
INDIVIDUAL and COLLECTIVE strategies + POSITION the firm to shelter (protger)
from the forces of competition.
DEFINING INDUSTRY BOUNDARIES = key criterion = substitution + industry
definition depends upon the strategic issues being considered
KEY SUCCESS FACTORS = GATEWAY to the analysis of competitive advantage