Industry Analysis.ppt

The Industry Environment Industry & Comp Analysis

1

Analysis of the industry Definition  An industry is a group of firms producing products that are close substitutes  Firms that influence one another  Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness & earning above-average returns. Industry & Comp Analysis

2

Definition cont’d … 

Analysis of the industry environment is focused on the factors & conditions influencing the firm’s profitability in the industry.



Compared to the general environment, the industry environment has a more direct effect on the firm’s strategic competitiveness & capability of earning above-average returns Industry & Comp Analysis

3

Definition cont’d … It refers to the analysis of: 

Industry trends as a whole;



Competition within the industry;



Technologies employed;



What it takes to succeed – the key success factors (KSF);



Comparing the firm, its products, its systems, its technology etc., with other firms in the industry. Industry & Comp Analysis

4

Nature And Degree Of Competition The nature and degree of competition in an industry hinge on five forces: 1. The

threat of new entrants

2. The

bargaining power of suppliers

3. The

bargaining power of buyers

4. The

threat from substitute products

5. Rivalry

(competition) among existing firms Industry & Comp Analysis

5

Porter’s Forces Driving Industry Competition

Threat of New Entrants 

Threat of new entrants ◦ new entrants to an industry bring new capacity, a desire to gain market share and substantial resources ◦ The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors.



Entry barrier ◦ an obstruction that makes it difficult for a company to enter an industry

Barriers to Entry Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages due to size Government policies

Threat of Entry cont’d … Economies of scale:  Deter entry by forcing the aspirant either to come in on large scale or accept a cost disadvantage. 

Scale of economies in production, research, marketing, and service are probably the key barriers to entry in the mainframe computer industry, as Xerox and GE discovered. Industry & Comp Analysis

9

Threat of Entry cont’d … Product differentiation:  Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. 

Factors fostering brand identification are being first in the industry, advertising, customer service, and product differences.



Product differentiation is perhaps the most important barrier in soft drinks, cosmetics, and investment banking. Industry & Comp Analysis

10

Threat of Entry cont’d … Capital requirements: 

The need to invest large financial resources in order to compete creates a barrier to entry.



Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up loses.



The huge capital requirements in certain fields, such as computer manufacturing and mineral extraction, limit other entrants. Industry & Comp Analysis

11

Threat of Entry cont’d … Cost disadvantages independent of scale: 

Entrenched companies may have cost advantages not available to potential rivals, no matter what their size and economies of scale.



These advantages can stem from the effects of: ◦ the learning curve, and proprietary technology, ◦ access to the best raw material sources, ◦ assets purchased at pre-inflation prices, ◦ government subsidies, favorable location, and ◦ official rights (patents) Industry & Comp Analysis

12

Threat of Entry cont’d … Access to distribution channels: 

Affects new entrants since the new product must displace others via price breaks, promotions, and intense selling efforts.



When there are limited wholesale or retail channels and the existing competitors occupied them, entry into the industry will be tougher. Industry & Comp Analysis

13

Threat of Entry cont’d … Government policy: 

The government can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw materials.



The government also can play a major indirect role by effecting entry barriers through controls such as air and water pollution standards and safety regulations.

Industry & Comp Analysis

14

Threat of Entry cont’d … Expected Retaliation  Existing

firms might respond in different ways when new comers inter in to the market.

 Responses

by existing competitors may depend on a firm’s present stake in the industry and available business options Industry & Comp Analysis

15

? Analyze Some Industries in our Country where you believe there are some barriers to entry

Industry & Comp Analysis

16

Powerful Suppliers 

Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services affecting the profitability of the industry.

Industry & Comp Analysis

17

Powerful Suppliers cont’d … Supplier power increases when: 

Suppliers are large and few in number



Suitable substitute products are not available



Individual buyers are not large customers of suppliers and there are many buyers



Suppliers’ goods are critical to buyers’ marketplace success



Suppliers’ products create high switching costs



Suppliers pose a threat to integrate forward into buyers’ industry Industry & Comp Analysis

18

Powerful Buyers 

Customers can force down prices, demand higher quality or more service, and play competitors off against each other – all at the expense of industry profits.



The product buyers’ purchase from the industry is standard or undifferentiated. ◦ In this situation, the buyers are always sure that they can find alternative suppliers, may play one company against another. Industry & Comp Analysis

19

Powerful Buyers cont’d … Buyer power increases when: 

Buyers are large and few in number



Buyers purchase a large portion of an industry’s total output



Buyers’ purchases are a significant portion of a supplier’s annual revenues



Buyers can switch to another product without incurring high switching costs



Buyers pose threat to integrate backward into the sellers’ industry Industry & Comp Analysis

20

Threat of Substitute Products  The

threat of substitute products increases when: ◦ Buyers face few switching costs ◦ The substitute product’s price is lower ◦ Substitute product’s quality and performance are equal to or greater than the existing product Industry & Comp Analysis

21

Rivalry among Existing Firms In most industries, corporations are mutually dependent.  A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation. 

Rivalry among Existing Firms Number of competitor s Amount of fixed costs

Rate of industry growth

Product or service characteristi cs

Capacity

Height of exit barriers

Diversity of rivals

Relative Power of Other Stakeholders

A sixth force that should be added to Porter’s list to include a variety of stakeholder groups from the task environment.  Government  Local communities  Creditors  Trade associations  Special interest groups  Unions  Shareholders 

Industry Evolution  



Over time, most industries evolve through a series of stages from growth through maturity to eventual decline. The industry life cycle is useful for explaining and predicting trends among the six forces that drive industry competition. Fragmented industry ◦ no firm has a large market share and each firm only serves a small piece of the total market in competition with other firms



Consolidated industry ◦ domination by a few large firms, each struggles to differentiate products from its competition

Categorizing International Industries According to Porter, world industries vary on a continuum from multidomestic to global.  Multi-domestic industries 

◦ specific to each country or group of countries ◦ This type of international industry is a collection of essentially domestic industries.



Global industries

◦ operate worldwide with multinational companies making only small adjustments for country-specific circumstances



Regional industries

◦ multinational companies primarily coordinate their activities within regions

Continuum of International Industries Figure 2-3 Continuum of international industries

Strategic Groups 

Strategic group ◦ a set of business units or firms that pursue similar strategies with similar resources



Companies or business units belonging to a particular strategic group within the same industry tend to be strong rivals ◦ Thus, tend to be more similar to each other than to competitors in other strategic groups within the same industry.

Strategic Types 



A strategic type is a category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy. Defenders ◦ focus on improving efficiency



Prospectors

◦ focus on product innovation and market opportunities



Analyzers

◦ focus on at least two different product market areas



Reactors

◦ lack a consistent strategy-structure-culture relationship

Hypercompetition 

Most industries today are facing an ever-increasing level of environmental uncertainty.



Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents and tactical redefinitions of market boundaries as diverse industries merge.



In hypercompetitive industries, competitive advantage comes from an up-to-date knowledge of environmental trends and competitive activity coupled with a willingness to risk a current advantage for a possible new advantage.

Interpreting Industry Analyses Low entry barriers

Suppliers & buyers have strong positions

Unattractive industry

Strong threats from substitute products Intense rivalry among competitors

Low profit potential

Industry & Comp Analysis

31

Interpreting Industry Analyses cont’d … High entry barriers

Suppliers & buyers have weak positions

Attractive industry

Few threats from substitute products Moderate rivalry among competitors

High profit potential Industry & Comp Analysis

32

Competitor Analysis Industry & Comp Analysis

33

Competitor Analysis  Competitor

analysis focuses on each company against which a firm directly competes.

 Analysis

of competitors is focused on predicting the dynamics of competitors' actions, responses & intentions Industry & Comp Analysis

34

Competitive Intelligence  Competitive

intelligence

◦ a formal program of gathering information on a company’s competitors ◦ also called business intelligence

Sources of competitive intelligence:    

Information brokers Internet Industrial espionage Investigatory services

Competitor Analysis cont’d … 

Competing firms are keenly interested in understanding each other’s objectives, strategies, assumptions and capabilities.



Furthermore, intense rivalry creates a strong need to understand competitors.

Industry & Comp Analysis

36

Competitor Analysis cont’d … In a competitor analysis, the firm seeks to understand: 

What drives the competitor, as shown by its future objectives.



What the competitor is doing and can do, as revealed by its current strategy.



What the competitor believes about its own firm and the industry, as shown by its assumptions.



What the competitor’s capabilities are, as shown by its strengths and weaknesses. Industry & Comp Analysis

37

Competitor analysis components

Industry & Comp Analysis

38

Competitor Analysis cont’d … 

Competitor intelligence is used to get data and information about competing firms.



Competitor intelligence is the set of data and information the firm gathers to better understand and better anticipate competitor’s objectives, strategies, assumptions and capabilities. Industry & Comp Analysis

39

Competitor Analysis cont’d … 

Information about these different dimensions helps the firm to prepare an anticipated response profile for each competitor.



Thus, the result of an effective competitor analysis helps a firm to understand, interpret and predict its competitors’ actions and responses. Industry & Comp Analysis

40

Competitor Array One common and useful technique is constructing a competitor array. The steps include: 1.

Define your industry - scope and nature of the industry

2.

Determine who your competitors are

3.

Determine who your customers are and what benefits they expect

4.

Determine what the key success factors are in your industry Industry & Comp Analysis

41

Competitor Array cont’d … 5.

Rank the key success factors by giving each one a weighting - The sum of all the weightings must add up to one.

6.

Rate each competitor on each of the key success factors

7.

Multiply each cell in the matrix by the factor weighting.

8.

Sum columns for a weighted assessment of the overall strength of each competitor relative to each other Industry & Comp Analysis

42

Using Key Success Factors to Create an Industry Matrix



Key success factors

◦ variables that can significantly affect the overall competitive positions of companies within any particular industry ◦ They are usually determined by the economic and technological characteristics of the industry and by the competitive weapons on which the firms in the industry have built their strategies.

Industry Matrix 

Industry matrix ◦ summarizes the key success factors within a particular industry

Table 2-3 Industry Matrix

This can best be displayed on a two dimensional matrix - competitors along the top and key success factors down the side. An example of a competitor array follows: Key Industry Success Factors

Weighting

Competitor #1 rating

Competitor #1 weighted

Competitor #2 rating

Competitor #2 weighted

1. Extensive distribution

.4

6

2.4

3

1.2

2. Customer focus

.3

4

1.2

5

1.5

3. Economies of scale .2

3

.6

3

.6

4. Product innovation .1

7

.7

4

.4

20

4.9

15

3.7

Total

1.0

Industry & Comp Analysis

45

THANK YOU!

Industry & Comp Analysis

46