Industrial Analysis

Origin

 Influenced by Industrial Organization & Economics

 1980 – Michael Porter’s “Competitive Strategy”

 Positions in the economic marketplace

 Concept

External Appraisal Internal Appraisal

Threats & Strengths &

Opportunities Weaknesses

Key Success Distinctive

Factors Competencies

Creation
of
Strategy

Choice
of
Strategy

Implementation of
Strategy
 Concept
 Strategies are generic, specifically common, identifiable positions in
the market place.
 The marketplace is economic and competitive
 The strategy formation process is there fore one of selection of these
generic positions based on analytical calculation.
 Analysts play a major role in the process, feeding the results of their
calculations to managers who officially control the choices.
 In effect market structure drives deliberate positional strategies that
drive organizational structure.
 Evolution
 First Wave
 Military Maxims

 Succesive Waves
 External Analysis
 Porter’s Model of Competitive Analysis
 Internal Analysis
 Value Chain
 Generic Strategies
 Military Maxims
Sun Tzu – 400 B.C
 Selection of optimal strategy
 Being informed of enemy strength
and place of battle
 Attention to position strategies
 Do not fight in dispersive ground
 If weaker in number then be capable
of withdrawing
 If equal in strength then engage the
enemy
 Extrapolated to business and market
Clausewitz - 1780 - 1831
 Aftermath of Napoleonic wars
 Organization in a chaotic situation
 Strategy depends on basic building
blocks
 For the large company
 Planning is crucial
 Give up the crumbs
 Preserve strengths
 For the small company
 Attack when the enemy retreats
 Be inconspicuous
 Respond quickly
Five Forces Model
 Five Forces Model

Potential
Entrants

Threat of New
Entrants

Industry
Bargaining Power Competitors Bargaining Power
Suppliers of Suppliers of Buyers Buyers
Intensity of Rivalry

Threat of
Substitute Products
and /or Services

Substitutes
Five Forces Model
 “Five Forces” - Explained

 Provides a framework to analyze the forces that reduce the

profits of an industry

 Focuses on whether or not a force is sufficiently strong to reduce

or eliminate the profit of an industry

 Focuses on an industry as a whole – not on individual firms

 The stronger these forces are, the more likely the profits will be
less for the particular industry
 1 - Threat of New Entrants
 Barriers to entry caused by

 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Learning Curve
 Cost disadvantages
 Government policy
 1 - Threat of New Entrants
 Some industries are harder to enter than others.
 The Pharmaceutical Industry, with all of its risks and high-price patents, is
almost impossible for new firms to get in on the huge profit margins.
 A pizza shop has a very low barrier to entry - almost anyone with an oven
and some pepperoni can start one.

 Some industries can create barriers to entry by having customers

dedicated to their brand.
 For example fizzy, syrupy water. It takes a small capital investment, but
big soft drink companies have squeezed out potential competitors with
huge marketing campaigns.
 2 - Bargaining Power of Buyers

 Buyer purchases large volumes relative to the seller sales

 Buyer purchases are a significant portion of the buyer’s total
costs
 The product it purchases from the industry are standard or
undifferentiated
 Face few switching costs
 Product is unimportant to the quality of the buyers’ products or
services
 Buyer has full information
 2 - Bargaining Power of Buyers

 Buyers with weak bargaining power are favorable.

 If you sell super-computers and you have very few customers, those
customers wield a lot of power.

 Sometimes losing one sale can make or break the business.

 Another factor that affects buyer power is differentiation.

 Commodities like oats or pulp for paper have strong buyers because it
makes no difference which supplier they choose
 3 - Bargaining Power of Suppliers
 Few suppliers – supplier concentration
 Not obliged to contend with other substituted products
 Industry is not an important customer of the supplier group
 Suppliers product is an important input to the buyers business
 The supplier groups products are differentiated or it has built
up switching costs
 The supplier group poses a credible threat of forward
integration
 The supplier group poses a credible threat of backward
integration
 3 - Bargaining Power of Suppliers

 Suppliers with low bargaining power are good for business.

 For example, in the coffee industry, the growers have very low
bargaining power. They are poor, fiercely competitive and usually rely
heavily on their buyers. A lb. of Green coffee costs the same today as it
did in the late 60's.

 Oligopolies/Monopolies within supplier groups can lead to high

bargaining power.
 A strong supplier would be Intel. What would happen if Dell stopped
selling "Intel Inside"? Computer buyers would take their money
somewhere else. Dell is in a very weak position and this is one reason
why the computer assembly business has its pitfalls.
 4 - Threat of Substitutes
 Relative Price of substitute
 Relative Quality of substitute
 Switching costs to buyers

 A substitute product for butter is margarine. A substitute for sugar is

aspartame. This is a product that is not quite the same, but the
customer can get the same value from it. When butter prices soar,
people can simply choose margarine, so the butter producers are not
free to set their prices wherever they want. If there was a good
alternative to gasoline, would the prices would fluctuate so much?
 5 - Intensity of Rivalry

 Numerous or equally balanced competitors

 Slow industry growth
 High fixed or storage costs
 Lack of differentiation
 Capacity
 Diverse competitors
 High strategic stakes
 High exit barriers
 Brand Identity
 5 - Intensity of Rivalry

 It is pretty obvious that it is unwise to enter an industry that is

already hugely competitive.
 As a North American firm, is it smart to enter the running shoe
manufacturing industry when you know that there are already many
developing countries who can drive down their costs due to cheaper labor
costs? Of course not.
SWOT Analysis
 SWOT Analysis
Environmental Variables Internal Variables

1. Societal Changes 1. Marketing

Changing customer preferences Product quality
Population trends Product lines
2. Governmental Changes Market share
New legislation Advertising
New enforcement priorities 2. R&D
3. Economic Changes Product R&D capabilities
Interest rates Process R&D capabilities
Real income 3. MIS
Exchange rates Speed & responsiveness
4. Supplier Changes Quality of information
Changes in input costs Expandability
Supply changes 4. Management Team
Changes in number of suppliers Skills
5. Competitive Changes Experience
Adoption of new technologies 5. Operations
Price changes Production capacity
New products Production cost structure
Competitors Inventory control
6. Market Changes Efficiency
New uses of products 6. Finance
New markets Financial & operating leverage
Product obsolesce Balance Sheet
 Assumptions & Premise
 Strategy formulation should be a deliberate process of conscious
thought
 Responsibility for that of control must rest with CEO
 The model of strategy formation must be kept simple and informal
 Strategies should be one of a kind
 The design process is complete when strategies appear fully
formulated as perspective
 Strategies should be explicit
 Finally strategy formulation is followed by implementation
 Critique
 By passes learning
 Can any organization be really sure of its strengths before it tests them?

 Structure follows strategy. Really!

 No organization can wipe the slate clean when it changes its strategy.

 Explicit strategy promotes inflexibility

 Organizations have to cope with uncertainties.
 Organizations must function during the strategy formulation process.

 Detaching thinking from acting