Industry Analysis

 Industry structure determines the

competitive rules of the game as well as
strategies available to the firm
 Competition in an industry is rooted in
its underlying economic structure
 The state of competition depends on
five basic competitive forces
 Competitive forces

• Threat of new entrant

•Intensity of rivalry among existing
competitors
•Threat of substitution
•Bargaining power of supplier
•Bargaining power of buyers
Threat of Entry
 New entrants bring new capacity
 Threat of entry depends on the barriers
to entry
 If barriers are high and the new comers
can expect sharp retaliation from
existing competitors the threat of entry
is low
 Six major sources of barriers to entry
Sources of barriers to entry
 Economies of scale : refer to decline in
unit cost of a product as the absolute
volume per period increases
 Deter entry by forcing the entrant to come
in at large scale
 Units of multibusiness firm may be able to
reap economies similar to those of scale if
they are able to share operations
Product differentiation
 Means that established firms have
brand identification and customer
loyalties
 Force entrants to spend heavily to
overcome customer loyalties
 Important entry barrier in baby care
products, over the counter drugs,
cosmetics, investment banking
Capital requirement
 Capital is required not only for creating
production facilities but also for things like
customer credit, inventories or covering up
start-up losses
 The need to invest large financial
resources in order to compete a barrier to
entry
 It limits the pool of likely entrants
Switching costs
 One time cost facing the buyer of
switching from one supplier’s product to
another’s
 It may include employee training costs,
cost of new ancillary equipment, cost
and time in testing new source
Access to distribution
channels
 New firm has to persuade the channels
to accept its product through price
breaks.
 New food product manufacturer has tp
persuade the retailer to give it space via
promises of promotion
Cost disadvantage
independent of scale
 Proprietaryproduct technology
 Favourable access to raw material
 Favourable locations
 Government subsidies
 Learning curve
 Ifcost decline with experience and experience
can be kept proprietary in an industry then this
effect leads to an entry barriers
 Cost decline with experience seem to be the
most significant in business involving a high
labour content performing intricate tasks.
Government Policy
 Government can limit entry into
industries with such control as licensing
requirements and limit on access to raw
materials
 Restrictions can stem from controls
such as air and water pollution
standards and product safety
Intensity of rivalry among
existing competitors
 Takes the form of jockeying for position
using tactics like price competition,
advertising battle, product introduction
and increased customer service
 Rivalry occurs because the one or more
competitors sees the opportunity to
improve position.
Reasons for rivalry
 Numerous or equally balanced competitors
 Slow industry growth
 High fixed or storage costs
 Lack of differentiation or switching costs
 Capacity augmented in large increments
 Diverse competitors
 High strategic stakes
 High exit barriers
Sources of exit barriers
 Specialized assets
 Fixed costs of exit
 Strategic relationship
 Emotional barriers
 Government and social restrictions
Barriers and profitability
Exit barriers
Low High
Low, stable Low, risky
Low
return return
Entry
barriers
High, stable High, risky
High return returns
Pressure from substitute
products
 Placea ceiling on the prices firms in
industry can profitably charge
Bargaining power of buyers
 Buyer group is concentrated or purchases
large volumes relative to seller sales
 The product it purchases from the industry
represent a significant fraction of buyer’s
costs.
 The products are standard
 Few switching costs
 Earns low profits
 Buyer has full information
Bargaining power of suppliers
 Dominated by a few companies
 The industry is not important customer
of the supplier group
 Supplier's product is an important input
to the buyer’s business
 Supplier’s products are differentiated or
it has build up switching costs
 credible threat of forward integration
Generic Competitive Strategies
 Overall cost leadership
 Differentiation
 Focus
Overall cost leadership
 Efficient-scale facilities
 Pursuit of cost reductions
 Tight cost and overhead control
 Cost minimization in areas like R& D,
sales force
 Low cost position protects the firm
against all five competitive forces
 Requireheavy capital investment,
aggressive pricing, start-up losses to
build market share
Differentiation

 Differentiating the product or service

offering of the firm
 Design or brand image. Technology,
features, customer service, dealer
network
 Focus
 Focusing on a particular buyer group,
segment of the product line, or
geographic market

Industry wide Differentiation Overall cost

leadership

Focus
Particular
segment only
 Requirement of Cost leadership
strategy
Commonly required Common organizational
skills requirements
Capital investment, Tight cost control,
Process engineering structured organizations
skills and responsibilities
Intense supervision pf Incentive based on
labour. Product meeting strict quantitative
designed for ease of targets
manufacture
Low cost distribution
 Requirement of Differentiation
strategy
Commonly required Common organizational
skills requirements
Strong marketing Strong coordination
abilities, product among function in R& D,
engineering, creative product development and
flair marketing
Strong capability in
research
Competitor Analysis
Components of Competitor
Analysis
 What drives the competitor
 Future goals
 Assumptions ( Held about itself and the industry)
 What the competitor is doing and can do?
 Current strategy( How the business is currently
competing?)
 Capabilities (Strength and weakness)
Future Goals
 Allow predictions about whether or not
each competitor is satisfied with its
present position and financial results
 How likely that competitor is to change
strategy and the vigor with which it will
react to outside events.
 Diagnostic questions
 What are the stated and unstated financial goals of the
competitor
 What is the competitors attitude towards risk?
 What is the organizational structure?
 What controls and incentive systems are in place?
 What kinds of managers comprise the leadership
 What are the current results and overall goal of the
parent company
 Why did the parent get into business
 Where does the corporate parent recruit from?
 Portfolio analysis ( Growth/share matrix)

Star Question Mark

High
Modest cash flow Large negative
cash flow
Growth
Cash Cow Dog
Large positive Modest cash flow
Low cash flow

High Low
Relative market share
Assumptions
 The competitor’s assumptions about
itself
 The competitor’s assumptions about the
industry and the other companies in it.
 Examining assumptions can identify
biases or blind spots
Diagnostic questions
 What does the competitor appear to believe about its
relative position
 Does the competitor have strong historical or
emotional identification with particular products
 Are there cultural, regional or national differences
 What does the competitor appear to believe about
future demand and about industry trends?
Capabilities
 Capabilities will determine ability to
initiate or react to strategic moves and
to deal with environmental or industry
events that occur
Areas of Competitor strength and
weakness
 Products
 Dealers/distrbution
 Marketing anmd selling
 Operations
 Research and engineering
 Overall costs
 Financial strength
 General managerial ability
Capability

 Core capabilities
 Ability to grow
 Quick response capability
 Ability to adapt changes
 Staying power
The Competitor Response
Profile
 Offensive moves
 Satisfactionwith current positions
 Probable moves
 Strength and seriousness of moves

 Defensive capability
 Vulnerability
 Provocation
 Effectiveness of retaliation
Competitor's response profile
 Is the competitor satisfied with its
current position
 What likely moves or strategy shifts will
competitor make?
 Where is the competitor vulnerable?
 What will provoke the greatest and most
effective retaliation by the competitor