Managerial Economics &

Business Strategy
The Nature of Industry

7-2

Overview
I. Market Structure

Measures of Industry Concentration

II. Conduct

Pricing Behavior
Integration and Merger Activity

III. Performance

Dansby-Willig Index
Structure-Conduct-Performance Paradigm

IV. Preview of Coming Attractions

7-3

Industry Analysis
Market Structure

Number and size of firms.

Industry concentration.
Technological and cost conditions.
Demand conditions.
Ease of entry and exit.

Conduct

Pricing.
Advertising.
R&D.
Merger activity.

Performance

Profitability.
Social welfare.

Market Structure

What is market structure?

Market structure is the organisational and
other characteristics of a market
We tend to focus on those characteristics of
a market which affect the degree of
competition between firms and their
pricing decisions
Traditionally we emphasise:
1.
2.

The number and size distribution of buyers and sellers

The existence or absence of barriers to entry and exit

Structural characteristics of a
market
The number of firms and the extent of overseas competition (e.g. from
within the single market or in global markets)
The market share of the largest businesses (measured by the
concentration ratio)
The nature of costs in the short and long run
The degree to which an industry is vertically integrated up and down
the supply chain (e.g. forward and backward vertical integration)
The extent of product differentiation / product branding
Price and cross price elasticity of demand
The number and size of buyers of the industrys product
The turnover of customers from one seller to another (also called
market churn) this is affected by brand loyalty and the effects of
advertising and marketing

Defining the market

Market and the industry are terms often used inter-changeably
But
If we define a market in a narrow sense, it is likely that there
will be fewer producers
E.g. the market for snooker tables or the market for air
travel to Jersey
A broader definition of the market often gives us more choice
E.g. the air transport industry
The market for sports footwear
Defining the market is important when we try to measure the
concentration ratio and the extent to which a market is
dominated by one or a few large producers

The nature of costs in a market

Entry costs into a market
Capital costs will vary from industry to industry
E.g. a natural monopoly
Sunk costs
These are costs that are not recoverable

E.g. advertising and marketing

Depreciation of capital equipment
High sunk costs makes a market less contestable
Natural cost advantages
Location advantages e.g. close to ports, access to cheaper labour
Ownership of important raw materials
Control of the supply chain through vertical integration

Competition,
Competition,market
marketstructures
structuresand
andbusiness
businessdecisions
decisions
Market
Marketstructures
structures

The
Thefirm
firminincompetitive
competitivemarkets
markets

Perfect
Perfectcompetition
competition

Non-perfect
Non-perfectcompetition
competition

Monopoly
Monopoly
Oligopoly
Oligopoly

Monopolistic
Monopolistic
competition
competition

Market Structures
Degree of competition in the industry
High levels of competition Perfect
competition
Limited competition Monopoly
Degrees of competition in between

Market Structure
Determinants of market structure

Freedom of entry and exit

Nature of the product homogenous (identical),
differentiated?
Control over supply/output
Control over price
Barriers to entry

Characteristics of Market Types

Market
structure

Examples

Parts of
Perfect
agriculture are
competitio
reasonably
n
close
Monopolisti
c
Retail trade
competitio
n

Number
of
producer
s

Many

Type of
product

Power
of firm
over
price

Barrier
s to
entry

Non-price
competition

Standardized

None

Low

None

Low

Advertising and
product
differentiation

Many

Differentiated

Some

Oligopoly

Computers,
oil, steel

Few

Standardized
or
differentiated

Some

High

Advertising and
product
differentiation

Monopoly

Public utilities

One

Unique
product

Considerable

Very
high

Advertising

12

Market Structure
Perfect
Competition

Pure
Monopoly

More competitive (fewer imperfections)

Market Structure
Perfect
Competition

Pure
Monopoly

Less competitive (greater degree

of imperfection)

Market Structure
Pure
Monopoly

Perfect
Competition

Monopolistic Competition

Oligopoly

Duopoly Monopoly

The further right on the scale, the greater the degree

of monopoly power exercised by the firm.

Market Structure
Importance:
Degree of competition affects
the consumer will it benefit
the consumer or not?
Impacts on the performance
and behaviour of the company/companies
involved

Market Structure
Models a word of warning!

Market structure deals with a number of economic models

These models are a representation of reality to help us to
understand what may be happening in real life
There are extremes to the model that are unlikely
to occur in reality
They still have value as they enable us to draw comparisons and
contrasts with what is observed
in reality
Models help therefore in analysing and evaluating they offer a
benchmark

Market Structure
Characteristics of each model:

Number and size of firms that make up

the industry
Control over price or output
Freedom of entry and exit from the industry
Nature of the product degree of homogeneity
(similarity) of the products in the industry (extent to
which products can be regarded as substitutes for each
other)
Diagrammatic representation the shape
of the demand curve, etc.

Market Structure
Characteristics: Look at these everyday products what type of
market structure are the producers of these products operating
in?
Electric
Guitar
Jazz
VodkaBody

Mercedes CLK Coupe

Canon
SLR Camera
Bananas

Remember to
think about the
nature of the
product, entry and
exit, behaviour of
the firms, number
and size of the
firms in the
industry.
You might even
have to ask what
the industry is??

Perfect Competition
One extreme of the market structure spectrum
Characteristics:

Large number of firms

Products are homogenous (identical) consumer
has no reason to express a preference for any firm
Freedom of entry and exit into and out
of the industry
Firms are price takers have no control
over the price they charge for their product
Each producer supplies a very small proportion
of total industry output
Consumers and producers have perfect knowledge about the
market

Monopolistic or Imperfect Competition

Where the conditions of perfect competition do
not hold, imperfect competition will exist
Varying degrees of imperfection give rise to
varying market structures
Monopolistic competition is one of these not to
be confused with monopoly!

Monopolistic or Imperfect Competition

Characteristics:

Large number of firms in the industry

May have some element of control over price due to the
fact that they are able to differentiate their product in
some way from their rivals products are therefore
close, but not perfect, substitutes
Entry and exit from the industry is relatively easy few
barriers to entry and exit
Consumer and producer knowledge imperfect

Monopolistic or Imperfect Competition

Some important points about monopolistic
competition:

May reflect a wide range of markets

Not just one point on a scale reflects many degrees
of imperfection
Examples?

Monopolistic or Imperfect Competition

Restaurants
Plumbers/electricians/local builders
Solicitors
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Funeral directors
Estate agents
Damp proofing control firms

Monopolistic or Imperfect Competition

In each case there are many firms
in the industry
Each can try to differentiate its product
in some way
Entry and exit to the industry is relatively free
Consumers and producers do not have perfect knowledge
of the market the market may indeed be relatively
localised. Can you imagine trying to search out the details,
prices, reliability, quality of service, etc for every plumber
in the UK in the event of an emergency??

Oligopoly
Competition between the few

May be a large number of firms in the industry but the

industry is dominated
by a small number of very large producers

Concentration Ratio the proportion of total

market sales (share) held by the top 3,4,5, etc
firms:

A 4 firm concentration ratio of 75% means the top 4

firms account for 75% of all
the sales in the industry

Oligopoly
Example:
Music sales

The music industry has

a 5-firm concentration
ratio of 75%.
Independents make up
25% of the market but
there could be many
thousands of firms that
make up this
independents group.
An oligopolistic market
structure therefore
may have many firms
in the industry but it is
dominated by a few
large sellers.

Market Share of the Music Industry 2002. Source IFPI: http://www.ifpi.org/site-content/press/20030909.html

Oligopoly
Features of an oligopolistic market structure:

Price may be relatively stable across the industry

kinked demand curve?
Potential for collusion
Behaviour of firms affected by what they believe their rivals
might do interdependence of firms
Goods could be homogenous or highly differentiated
Branding and brand loyalty may be a potent source of competitive advantage
Non-price competition may be prevalent
Game theory can be used to explain some behaviour
AC curve may be saucer shaped minimum efficient scale
could occur over large range of output
High barriers to entry

CI Telecome
https://www.youtube.com/watch?
v=u_uePM3Gsk4

Is your house loyal to one

supermarket?
Why?

Supermarkets
Oligopoly behaviour

Supermarket non price competition

On line shopping
Supermarket store website
Opening hours
brand / product range
Non food products

Sainsburys

Waitrose

Tesco

alibaba
https://www.youtube.com/watch?
v=9VTggkSykpI

The main features of Oligopoly

behaviour.

Oligopoly behaviour
Non price competition
Price rigidity
L shape cost curve (flat
bottom!)
Collusion

Can you remember some industries

that are oligopolistic?

Petrol
Hotel
DIY
Electrical Retailing
Package Holidays
Banks
Phone
Soft drinks

Price rigidity
Despite changes in costs of production,
oligopoly prices appear to remain at a
constant level
Consider petrol prices. Very rarely
different within a geographical area
collusion or market forces?

Pfizer vs Merck
https://www.youtube.com/watch?
v=M5LNPB-malY

Formal Collusion forming a cartel.

Oligopolies do compete against each other
- known as non collusive behaviour.
However, there is an incentive to collude.
Formal collusion - is where firms set up
an agreement between each other they
create a cartel!

Tactic collusion
This is not illegal
It is where competitive firms monitor each
others behaviour closely and refrain from
competing on price.
This is often seen as price leadership where
competitors follow the dominant firms
lead.

Cartels
Where a few firms dominate they could set
an agreement on price, quantities for supply,
service standards etc
The collusion restricts output
The collusion raises prices
The collusion raises abnormal profits

Famous cartels - OPEC

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent

intergovernmental organization, currently consisting of 12 oil producing and
exporting countries, spread across three continents America, Asia and Africa.

The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq,
Kuwait, the Socialist Peoples Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi
Arabia, United Arab Emirates & Venezuela.

The organizations principal objectives are:

1. To co-ordinate and unify the petroleum policies of the Member Countries and to
determine the best means for safeguarding their individual and collective interests;
2. To seek ways and means of ensuring the stabilization of prices in international oil
markets, with a view to eliminating harmful and unnecessary fluctuations; and
3. To provide an efficient economic and regular supply of petroleum to consuming
nations and a fair return on capital to those investing in the petroleum industry.

Duopoly
Market structure where the industry is dominated
by two large producers

Collusion may be a possible feature

Price leadership by the larger of the two firms may exist the
smaller firm follows the price lead
of the larger one
Highly interdependent
High barriers to entry
Cournot Model French economist analysed duopoly
suggested long run equilibrium would see equal market share and
normal profit made
In reality, local duopolies may exist

Monopoly
Pure monopoly where only
one producer exists in the industry
In reality, rarely exists always
some form of substitute available!
Monopoly exists, therefore,
where one firm dominates the market
Firms may be investigated for examples of
monopoly power when market share exceeds 25%
Use term monopoly power with care!

Monopoly
Monopoly power refers to cases where firms influence
the market in some way through their behaviour
determined by the degree
of concentration in the industry

Influencing prices
Influencing output
Erecting barriers to entry
Pricing strategies to prevent or stifle competition
May not pursue profit maximisation encourages unwanted
entrants to the market
Sometimes seen as a case of market failure

Monopoly
Origins of monopoly:

Through growth of the firm

Through amalgamation, merger
or takeover
Through acquiring patent or license
Through legal means Royal charter, nationalisation,
wholly owned plc

Monopoly
Summary of characteristics of firms exercising
monopoly power:

Price could be deemed too high, may be set to

destroy competition (destroyer or predatory pricing),
price discrimination possible.
Efficiency could be inefficient due to lack of
competition (X- inefficiency) or
could be higher due to availability of high profits

Monopoly
Innovation - could be high because
of the promise of high profits, Possibly
encourages high investment in research and
development (R&D)
Collusion possible to maintain monopoly power
of key firms
in industry
High levels of branding, advertising
and non-price competition

Monopoly
Problems with models a reminder:

Often difficult to distinguish between a monopoly

and an oligopoly both may exhibit behaviour
that reflects monopoly power
Monopolies and oligopolies do not necessarily aim
for traditional assumption of profit maximisation
Degree of contestability of the market may influence behaviour
Monopolies not always bad may be desirable
in some cases but may need strong regulation
Monopolies do not have to be big could exist locally

Contestable Markets
Theory developed by William J. Baumol,
John Panzar and Robert Willig (1982)
Helped to fill important gaps in market
structure theory
Perfectly contestable market the
pure form not common in reality but a
benchmark to explain firms behaviours

Contestable Markets
Key characteristics:
Firms behaviour influenced by the threat
of new entrants to the industry
No barriers to entry or exit
No sunk costs
Firms may deliberately limit profits made
to discourage new entrants entry limit
pricing
Firms may attempt to erect artificial barriers
to entry e.g

Contestable Markets
Over capacity provides the
opportunity to flood the market
and drive down price in the event
of a threat of entry
Aggressive marketing and branding
strategies to tighten up the market
Potential for predatory
or destroyer pricing
Find ways of reducing costs and
increasing efficiency to gain competitive
advantage

Contestable Markets
Hit and Run tactics enter the
industry, take the profit and get
out quickly (possible because of
the freedom of entry and exit)
Cream-skimming identifying
parts of the market that are high
in value added and exploiting
those markets

Contestable Markets
Examples of markets exhibiting
contestability characteristics:
Financial services
Airlines especially flights
on domestic routes
Computer industry ISPs, software,
web development
Energy supplies
The postal service?

Market Structure Conduct

and Performance
A2 Economics May 2009

Approaches to Studying
Industry

7-59

The Structure-Conduct-Performance (SCP) Paradigm:

Causal View
Market
Structure

Conduct

The Feedback Critique

No one-way causal link.

Conduct can affect market structure.
Market performance can affect conduct as
well as market structure.

Performance

Structure-Conduct-Performance
Market Structure:

Number of buyers and sellers

(e.g., CR4)
Barriers to entry
Substitutes
Cost Structures
Regulation
60

Structure-Conduct-Performance
Industry concentration is measured by the four-firm sales
concentration ration (CR4).
Problem: CR4 = .6 (.15, .15, .15, .15) or
CR4 =.6 (.57. .01, .01, .01)
Which is more likely to exhibit monopoly power?
Alternative Measure: Herfindahl-Hirschman Index (HHI index)

61

Structure-Conduct-Performance
HHI = sum of market shares squared.
A monopolist (1 firm with 100% of market) the
10,000

HHI =

44 firms (57, 1, 1, 1 ) = 3292 (3249 + 43)

7 firms (15, 15, 15, 15, 15, 15, 10) = 1450
Correlation between CR4 and HHI in 1982 was 0.954

62

Structure-Conduct-Performance
Defining the relevant market:

Even more important than choosing the proper index of

concentration is ensuring that the market for which
concentration is being measured is properly defined.
In the United States, the basic system is called the
Standard Industrial Classification (SIC). Onto it, the
Census Bureau has grafted an even more intricately
subdivided system organized around a series of seven
digit numbers, each successive digit reflecting a finer
degree of classification.

63

Structure-Conduct-Performance
In 1982, the manufacturing sector was
divided into 450 such four-digit industries.
SIC Code

CR4

# of firms HHI

3632 household refrig.

3511 turbines
2082 beer
.77
3011 tires
2834 pharmaceuticals
3237 ready-mix concrete

.94
.84
.66
.26
.06

39
71

2745
2602
67
2089
108
1591
584
1306
4161
18

64

EXHIBIT 1

CONCENTRATION RATIOSPERCENTAGE
OF TOTAL INDUSTRY SALES PRODUCED BY
THE LEADING FOUR FIRMS, AND HHI

Source: U.S. Bureau of the Census, 1992 Concentration Ratios in Manufacturing, 1996.

65

66

Relating the Five Forces to the SCP

Paradigm and the Feedback Critique

Entry

Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale

Power of
Input Suppliers

Industry Rivalry

Network Effects
Reputation
Switching Costs
Government Restraints

Level, Growth,
and Sustainability
Of Industry Profits

Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints

Concentration
Price, Quantity,
Quality,
or Service Competition
Degree of
Differentiation

Switching Costs
Timing of Decisions
Information
Government
Restraints

7-67

Power of
Buyers

Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints

Substitutes & Complements

Price/Value of Surrogate
Network
Products or Services
Effects
Price/Value of Complementary Government
Products or Services
Restraints

Indian automobile industry

policy & structure

Main Policy Changes after 1993

(1993,1997,2002)

Delicensing 1993-94.
Decontrol
Free entry and exit of firms.
Allowing for FDI
Reducing of tariff on components .
Allowing FDI up to 100% (Hyundai)
Reduction in excise duty.

Indian automobile industry after liberalization

In 1993, the Indian government deregulated entry in to

automobile industry and decontrolled output levels and
significantly reduced the import tariff on the auto
components.These changes led to an influx of MNES in to the
Indian passenger cars segment,

Assembling plants as on 1990 Assembling plants as on 2000

Maruti Udoyog ltd.,
Hindustan motors ltd.,
Premier Automobiles ltd.,
standard motor production of
India ltd.,
Sipani automobiles

M/s Maruti Udyog Ltd.

M/s Hindustan Motors Ltd.
M/s Daewoo Motors (India) Ltd.
M/sPremier Automobile Ltd.
M/s PAL Peugeot Ltd.
M/s General Motors (India) Ltd.
M/s TELCO
M/s Mahindra & Mahindra Ltd.
M/s/ Mercedes Benz (India) Ltd.
M/s Ford India LTD
M/s Huyndai India Ltd.
M/s Honda SIEL India Ltd.
M/s Toyota India Ltd.

Evolution of Indian passenger car and

MUV segments
Pre- Maruti phase (or ) regulatory phase
from the (1951 to 1981)
The Maruti phase (or) the first phase of
liberalisation from (1982-1993)
The Post-Maruti Phase or era of
globalization from 1993 onwards.

Producer and Seller Share of Passenger Cars and Jeeps Segment in Pre-Maruti Phase
Cars segment
Years
1960-61
1965-66
1970-71
1975-76
1980-81

HM
PS
MS
48.26
49
70.55
71
64.99
65
51.4
50
70
71

PAL
PS
MS
34.12
34
25.12
25
33.21
34
47.3
50
29
28

Jeeps
segment

SMPIL
PS
MS
18.62
17
4.47
4
1
1
n/a
n/a
n/a
n/a

SIPANI
PS
MS
n/an/a
n/a
n/a
n/a
n/a
*
n/a
1
1

M&M
PS
MS
100
100
100
100
100
100
100
100
100
100

Producer and Market Share of Passenger Car Segment Maruti Era

(per cent)
1984-85
PS
MS
HM
PAL
MUL
SIMPL
SIPANI

32.38
36.82
29.55
*
*

39
42
17
*
*

1988-89
PS
MS
17.48
23.37
59.41
*
*

N.A
N.A
N.A
*
*

1991-92
PS
MS
12.4
11.4
72.8
*
*

15.72
11.29
69.77
*
*

Market Share Behaviour of Car Segment during the era of liberalisation (Per cent)
Producer
1993-94
1995-96
1998-99
2000-01
Maruti Udyog ltd.
66.08
69.96
69.61
48.61
Hyundai motors
n/a
n/a
4.72
17.17
Telco
n/a
6.63
1.26
7.41
Hindustan motors
14.45
8.67
6.44
6.55
Daewoo motors
n/a
5.61
3.25
5.77
Honda Siel car Ind.
n/a
n/a
5.71
4.07
Fiat India auto
n/a
n/a
3.03
n/a
Ford India
n/a
n/a
2.07
5.39
General motors
n/a
n/a
2.84
n/a
Premier auto ltd.
11.97
4.58
0.99
n/a
Maestro motors
7.27
0.22
n/a
n/a
Mercedes Benz
n/a
n/a
n/a
0.01
Pal-Peugeot
n/a
2.83
n/a
n/a
Others
0.24
1.9
0.65
5.01
Source: CMIE Market Shares And Financial Aggregates.

Price Based Classification of Passenger Cars

Sub-Segment
A-segment
B-segment
C-segment
D-segment
E- segment

Price Range
Less than Rs. 3,00,000
Between Rs. 3,00,0005,00,000
Between Rs. 5,00,00010,00,000
Between Rs. 10,00,00025,00,000
Cars priced above Rs.
25,00,000

Major players
Maruti, Hyundai
Maruti, Hyundai, Daewoo, Telco
Maruti, Hyundai, Daewoo, Fiat, General Motors, Ford,
Hindustan motors (Mitsubishi
Honda Siel, Hyundai
Mercedes Benz

Length Based Classification of Passenger Car Industry and Their Recent

Performance
SEGMENT `A
-3.4 MM

MODELS
M800
Omni
Total

Lower B
3.4 3.65 mm

Upper B
3.65 4 mm
Lower `C
4.0-4.2 mm

Upper-C
4.2-4.5 mm

Miscel

Luxury
'D' more than
5000 mm

SALES
1999- 2000
189,061
82,427
271,488

%MS
30.7
13.4
44.1

SALES
2000 -01
151,866
60,239
212,105

%
MS
26.3
10.4
36.7

SALES 2001 -02 %

MS
145,868
60,457
206,325

24.9
10.3
35.2

SALES
2002 %
03
MS
112,421
40,667
153,088

23.1
8.3
31.4

Zen
Alto

80,801
-

13.1

60,908
24,193

10.5
4.4

66,528
27,107

11.3
4.6

51,844
21,072

10.7
4.3

Wagon R
Uno
Santro
Matiz
Total
Indica
Palio
Total
Esteem
Accent
Siena/Wk
Ikon
Corsa/Swn
Indigo

5,903
16,095
69,546
38,821
211,166
54,995
54,995
16,031
6,209
4,597
6,259
306

1.0
2.6
11.3
6.3
34.3
8.9
8.9
2.6
1.0
0.7
1.0
0.1

19,200
7212
64,876
45,870*
222,259
43,823
43,823
12,176
16,085
2,057
18,023
5,318

3.3
1.3
11.2
7.9
38.4
7.6
7.5
2.1
2.8
0.4
3.1
0.9

25,829
3,306
69,327
13,250
205,347
64,325
17,148
81,473
11,831
17,797
880
14,374
6,781

4.4
0.5
11.8
2.2
35.1
11.0
2.9
13.9
2.0
3.0
0.1
2.4
1.1

26,616
710
69,976
400
170,618
59,448
20,732
80,180
8,649
16,578
2,559
12,048
5,157
2,146

5.5
0.1
14.4
35.0
12.2
4.3
16.5
1.7
3.4
0.5
2.4
1.1
0.4

Total
Cielo/Nex
Astra
City
Lancer
Baleno/Altu
Total
Ambass
Versa

33,492
3,158
2,737
9,772
8,300
1,947
27,636
18,227

5.4
0.5
0.4
1.6
1.3
0.3
4.5
2.9

53,659
2,000*
2,946
10,011
7,335
3,059
25351
19,781

9.3
0.3
0.5
1.7
1.3
0.5
4.3
3.4

51,663
100
1,984
9,596
6,540
1,093
19.313
13,034
1,332

8.8
-0.3
1.6
1.1
0.1
3.3
2.2
0.2

47,137
-1,035
10,000
4,152
380
15,567
11,433
1,592

9.2
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2,227

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1,288

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722

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5,171

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505

409

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Chevron Professional Services Research Report

Strategy Consulting
Executive Summary

Executive Summary

Project Objective

Providing knowledge of the Strategy Consulting Professional Services Market characteristics,

dynamics, pricing trends, demand/supply value chain analysis, competitive landscape, and supplier
SWOT analysis

Project in-scope

In-scope

Global
US

Strategic Consulting

This involves services in the area of Finance, Planning, Marketing and Organizational strategy
Definition Includes:

Strategic planning
Financial strategy
Organizational strategy
Marketing and branding strategy
IT strategy

Definition DOES NOT include:

Operations Consulting
HR Consulting
IT services

Key Findings

Growing complexity of global markets, regulatory & compliance requirements, opportunities in

emerging economies, increased M&A pursuits, increased risk management complexity and expanding
litigation activity are driving revenue growth for Strategic Consulting

The US is the largest business consulting market in the world, with an average annual growth rate of
15%

Implication: Onsite Billing rates will see an increase hence the approach is go for a service mix with a suitable
offshore component also

Region-specific consulting companies and Systems Integrators are competing intensely with the global
majors

Implication: Clients will have to work towards articulating the vision and business purpose to get the best of
the pull factor

The industry is facing a supply crunch and thus firms are short staffed

Implication: Traditional IT systems Integrator firms will strengthen their offerings by investing or buying firms
in the US

Today, client pull is affecting the dynamics of the marketplace to a greater extent then ever before

Implication: A single provider may not be able to deliver the entire gamut of services. In-house capabilities
have to be built.

Implication: Since competition is coming from new entrants, the established firms are pressurized to better their
value proposition. The client can use this to its advantage to negotiate on billing rates

The top management consulting firms have entered into alliances with various companies across
industries to extend their technology and business capabilities

Implication: Clients need to make sure that they get the best pricing for an end-to-end consulting plus
implementation engagement

Executive Insight

Executive Insight

Traditional- A Predictive path to the future can be paved from the experience
of the past
The New Approach- Strategy is a coherent and evolving portfolio of
initiatives to drive shareholder value and long-term performance (you are
what you do opposed to you are what you say)
@Mckinsey & Co.

MARKET
CHARACTERISTICS

Market Overview
Market Growth (CAGR- 7
.1%)

Strategy Consulting Growth Drivers

Strategic

Economic

Operational

Merger and Acquisition activity in the client

landscape
Need for outsourcing advisory services
Target unexplored regional markets
SOX compliance related services

Pressure on reducing billing rates

Eroding IT consulting fee structure
GDP growth across industries

Need for highly specialized skills in

engagements

Innovate on service delivery

Need for Data management related to SOX

compliance solutions

Risk Mgmt.

Improve operational controls

Impact of Attrition on consulting assignments

HR

Need for highly specialized skillsets

Competency building for IT strategy
engagements

Technology

Proprietary & Confidential - 85

Proprietary & Confidential

Market Size
Global Market Size : 2003-2007

Market Size by Function -2007

Current Strategy consulting market is estimated to be around $300 Billion and is expected to grow at a CAGR of
7.1%. It is the fastest growing in the professional services market

Geography & Industry

Market Breakdown by Geography

Market Share by Client Industry

Porters Five Forces Analysis

L

Threat of
New Entrants

Consulting firms are looking more at industry

experts with a mix of B-school graduates

Moderate to High
(5.7
5)

Bargaining Power
of Suppliers

Rivalry
Among
Firms

Moderate (4.25)

Moderate (5.0)

Top 8 players have less than 50% of the

market share
50-60% of the cost is consultant salaries
which is variable
Implementation methodologies vary across
the firms
Traditional segments like org. strategy and
strategic planning being performed easily in
house

Threat of
Substitute
Products

Though big brands still rule the roost, boutique

consulting firms dominate the market
Supply has reduced and inflation in salaries (6065% of total cost) is being observed
Current participants have extensive client
business knowledge
Emergence of IT strategy has opened up the
market for new players
Government policies like SOX are a major driver

Bargaining Power
of Buyers
Moderate (4.7
)

Low to moderate(4)

No single industry contributes more than 10-20%

of the total spending
Healthcare and Public sector are set to be major
spenders in the coming years
Corporate leaders need the support of consultants
to justify investments in areas like M&A and SOX
legislation (Financial Strategy)
Organizations are managing some strategy work
in-house
Considerable costs involved to switch consultants

Overall Scores
Low

Threat of New Entrants

Economies of Scale

Medium

5X

High

AVG.

5.75

Access to distribution channels

Existing firms have developed extensive client

knowledge and built long l sting relationships

Government policy

Government policies like SOX are driving strategic

consulting

No major backlash, some cases of consolidation (IBM

taking up PWCs Consulting arm)

Number and size of competitors

Existing players offer specialized services across

different areas with proven methodologies , brands are
well established with the C-level

Exit barriers
Capacity increment size

This may range between $10 and $100 million

Assignments with the client or research publications

Cost disadvantage (independent of size)

Cost of services reduce

with the increase in number of
Comments
billable hours
Top firms like Mckinsey, BCG and Bain have unique
services to offer

Capital Requirements

Past behavior of incumbents

Product Differentiation

Maturity

Supply Market Rivalry

Top 8 players have less than 50% of the market share

5

X
X

Manpower intensive industry. C-level relationships can

be leveraged in future
A new service line will add 5-6% additional resources

Ratio of net fixed cost to total costs

Low since 50-60% of the cost is consultant salaries

Ratio of total net assets (TNA) to sales

High Asset Turnover

Diversity of firms

Resources move across firms, no major differences

Industry growth

Growing at CAGR of 7.1% (Data Monitor)

Product Differentiation

Threat of Substitutes

Note: Blank templates are provided in the Appendices

Services are similar in nature

Org. Strategy and Strategic Planning being performed
inhouse

Overall Scores
Low

Importance of a single buying industry as

a customer to the industry under analysis

Medium

5X

Power of Buyers

Concentration of buyers
Importance of industrys product to
buyers

AVG.

X
4.71

Threat of backward integration by buyer

Buyers cost of switching suppliers

Considerable costs due to existing investments in

engagements
X

Strategic consulting accounts for less than 15 % of

spending

Importance of a single supplier industry

Concentration of suppliers

Critical for the client, Corporate leaders need the

support of consultants to justify investment in areas like
M&A and SOX
Organizations are managing some strategy work inhouse

Industrys share of total cost of buyers

materials

No single industry Comments

contributes for more than 10-20% of
spending. Healthcare and Public sector to pickup pace
Large and mid size firms , each fairly important

Profitability of buyers

Power of Suppliers

High

Organizations incurring losses deploy strategic

consultants

B-schools provide most of the manpower

Importance of industrys product to buyer

Top tier B-schools

X

4.25

10-20% of B-school graduates get into strategic

consulting

Threat of forward integration by

suppliers

B-schools are known for their research work and

consulting assignments

Threat of backward integration by

industry

Companies can create their own training groups.

Cost of switching suppliers

Availability of substitute raw materials

Profitability of suppliers

Easy to switch suppliers

X
X

Note: Blank templates are provided in the Appendices

Industry professionals moving to consulting

Most of the institutions are either profitable or funded
by external agencies

Porters Five Forces Analysis

Porters Five Forces Analysis - Implications for Buyer
Threat of
New Entrants
Moderate to High
(5.7
5)
Bargaining Power
of Buyers

Emergence of a large number of boutique consulting firms can benefit Chevron in terms of
specialized services at competitive prices. This will also reduce the dependence on a single
consulting firm
The trend has shifted to short term higher impact assignments from long term open ended
assignments Chevron can follow this approach to reduce risk and increase the quantifiable benefits.

Moderate (4.7
)
Threat of
Substitute Products

Chevron can perform some of the operational strategy and strategic planning work in house

Low to Moderate (4)

Bargaining Power
of Suppliers

The consultant team with the right mix of industry experts and B-school graduates will improve the
success and costs of the engagement

Moderate (4.25)
Rivalry Among
Firms
Moderate (5)

With the emergence of IT strategy firms are bundling consulting with implementation services. This
will be a good bargain for Chevron

SWOT Analysis
Strengths
Strategic
Services are essential for the client
Firms are growing through the acquisition route
thereby improving their service line
Consulting firms have struck cross-industry
alliance networks to enable effective
implementation
The role of consulting firms has extended from
just providing thought leadership to actual
execution (end-to- end solutions)
Competitive
Small, niche players have built a reputation for
specialized consultancy services
Managerial
Recruitment of industry experts has increased
relative to fresh B-School graduates
Firms have quickly adapted to global delivery
models
Industry practices of the consulting firms have
matured over the years

Weaknesses
Strategic
Consulting firms criticized for overuse of
buzzwords and a lack of innovation in services
Lack of accountability for the returns on the
consulting investment.
Long Open-ended engagements with no clear
deliverables
High dependence on individual expertise and Clevel Relationships
Competitive
Boutique firms competing on price with the big
league
Managerial
High rates of Attrition across levels due to a
competition of talent among firms
Unresponsive large firms & lack of (small) client
focus
Failure in executing engagements requiring
highly unique expertise

SWOT Analysis
Opportunities
Strategic
Increased spending on Financial and
Organizational strategy
High growth emerging regional markets
Historically under-performing country markets
experiencing accelerating services uptake
Favorable economic conditions in 2007 2008
lead to more discretionary spending on strategy
consulting
Vast amount of M&A activity help drive revenue
growth
Competitive
Emergence of new firms with specialized
services
Managerial
SOX related IT strategy and Planning Consulting
on the rise
Client demand for Innovative project staffing
models and creative billing arrangements

Threats
Strategic
Customer buying patterns changing with
traditional strategic Planning being performed inhouse
Executive Management exercising more caution
on spending to mitigate risk
Engagement durations reducing (< 6 mths) as
clients are looking at more impact based
specialized assignments
Maintain high margins
Competitive
Traditional SI firms acquiring boutique firms to
gain market share
Big league in threat from Offshoring firms
initiating a price battle
Managerial
Pressure on Billing rates as Consultant salaries
show a rapid increase.
Recruitment and retention of domain experts

Competitive Dynamics

Landscape

Strategy Consulting Value chain

Industry majors like Mckinsey, BCG are involved in Strategy development but the emergence of
boutique firms is heating up the competitive landscape
Systems Integration firms like Accenture, Deloitte and Bearing point are in the strategy implementation
space. At the same time they are also entering the strategy development space (increase in backward
integration)

Business Models

Integrated Strategy Consultancies (Bain, BCG, Mckinsey)

Formed during the second wave of the development of the consulting industry

Predominantly control the client interface in the business

Vast project experience and the ability to share and exploit knowledge
Challenges

Ways to build lasting relationships with clients to withstand periods of low work demand

Maintain high margins through cost reduction (partnerships/offshoring)

Need for more experienced resources in contrast to the existing pyramid model

Strategy implementers (Accenture, Deloitte, Bearing Point)

Ability to manage complex integration projects

Cost efficiency through standardization and scalability

Challenges

Establish internal strategy development groups

Client internal consulting teams taking over implementation tasks (e.g.Shell, Siemens)

Knowledge builders (Pipal, Evalueserve)

Speed, quality of analysis at reasonable costs, management of relationships

Focused networkers (Cardea, a-Connect)

Unbundling strategic consulting services

Help evaluate and deploy the best consultants

Trends

Traditionally Strategy Consulting firms have been characterized by high

profitability, high growth rates and rather limited competition
Shift towards a disaggregation of the Strategy Consulting value chain
Major drivers

Emergence of the Internet posing a threat to the internal research and knowledge
building capacities of strategy consultancies(Offshoring of Research services has
reduced entry barriers)
Skill gap between strategy consultants and their clients are narrowing (firms
recruiting inhouse consultants)
Clients are more demanding and have evolved into smarter buyers of consulting
services (Recruitment of former strategy consultants)
Price sensitivity due to competition (small specialized players, IT integrators,
alternative pricing-performance based)

Strategy Service Offerings

Executive Insight

Corporate strategy

Unit strategy
Strategy under uncertainty

Growth strategy

Corporate Value Added

Intangible based business building (IP, brands, networks and talent)

Business Unit strategy

Traditional- A Predictive path to the future can be paved from the experience of the past
The New Approach- Strategy is a coherent and evolving portfolio of initiatives to drive shareholder value
and long-term performance (you are what you do opposed to you are what you say)

Market opportunities
Capabilities
Management Passion

Strategic Planning Processes

Creative strategy development (killer idea approach)

Business unit/corporate planning processes

@Mckinsey &Co.

Strategy Service Offerings

Strategy

Branding

Marketing (Develop, deliver and manage brand & customer experiences)

Sales (Key Account management, Optimize sales channels and sales forces)
Pricing strategies
Consumer and customer insight (Business strategy plus market research)

Organization

Brand Value Creation

Brand Experience
Total Brand Management

Marketing and Sales

Strategic Planning
Strategic Vision
Portfolio Management
Business Unit and Corporate strategy

Role of the corporate center in value creation (Delayering TM the Organization)

Optimizing the People networks
Linking Accountabilities with Strategy
Managing Change and Getting results

Post merger Integration (PMI)- Planning, Organization, Execution and Change Management

@Boston Consulting Group Inc.

Strategy Service Offerings

Corporate strategy (effective strategy inspires and informs the actions of the executive team and mobilizes
employees)

Customer strategy and marketing

Core growth
Growth through adjacencies

Mergers and Acquisitions

Customer Loyalty
Customer segmentation
Marketing
Pricing
Product management
Sales/Channel management

Growth strategy (Revenue, cash flow and shareholder value)

Mission and Vision

Business Portfolio strategy
Role of the center
Shareholder Value
Strategic planning

M&A strategy
Acquisition screening
Strategic due diligence
Merger integration

Organization (Leadership)

@Bain & Co.

Value Chain Analysis

Pricing Model

Pricing
Structure
Cost Based Pricing

Market Based Pricing

Base: 2007
- Forecast Year 2009

Should Cost Model

Salary of human resources forms the biggest component of cost

Thank You