Structure Of A Competitive Industry

CHAPTER - 1 ANALYSIS – STRUCTURE OF A COMPETITIVE INDUSTRY COURSE – STRATEGIC MANAGEMENT 1

INTRODUCTION • Formulation of competitive strategy is relating a company to its environment i.e. the industry in which it competes. • Industry structure has strong influence on determining the competitive rules and strategies for a firm. • Differing ability of the firms to deal with the external forces gives them the competitive edge. •

The state of competition in an industry depend on five basic competitive forces as given by Michael Porter.

• Determining the ultimate profit potential of the industry i.e. the long run return on invested capital.

STRUCTURAL DETERMINANTS • Industry – Group of firms producing products that are close substitutes for each other. • Competition continually works to drive down the rate of return of invested capital. • Free Market Return – Yield on long-term government securities adjusted upward by the risk of capital loss. • Investors will not tolerate returns below this rate as there are alternative available. • Higher return stimulates inflow of capital by new entry or additional investment by competitors. • Strength of competitive forces determine this degree of inflow of investment driving the return to free market level

STRUCTURAL DETERMINANTS – Contd.. • Five Competitive Forces- (Michael Porter) – – – – –

Threat of New Entrants Threat of Substitutes Bargaining power of Buyer Bargaining power of Supplier Rivalry among existing Firms

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• THREAT OF NEW ENTRANTS

– Bring new capacity with a desire to gain market share – This results in reduction in price or increase in cost to incumbent firm resulting in reduced profitability – BARRIERS TO ENTRY • • • • •

Economies of scale. Product Differentiation. Capital / investment requirements. Customer switching costs. Access to industry distribution channels.

• Government regulations. Can new entrants get subsidies?

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• THREAT OF SUBSTITUTES

– All firms in an industry are competing and producing substitute products. – Substitute limits the profitability by placing a ceiling on the prices. – BARRIERS TO SUBSTITUTION • • • • •

Quality. Is a substitute better? Buyers' willingness to substitute. The relative price and performance of substitutes. The costs of switching to substitutes. Is it easy to change to another Product?

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• BARGAINING POWER OF BUYERS

– Buyers compete with the industry by forcing down prices and bargaining for quality and services. – Buyers play competitors at the expense of Industries profitability. – BUYER GROUP POSE A THREAT IF • • • • •

Concentration of Buyers – Few Buyers and many suppliers. Product represents a significant fraction of buyers purchase. Differentiation of Products is not existing. Switching cost is less. Profitability of the buyer.

• Threat of backward integration into the industry. • Quality and Service. • Information available to buyer.

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• BARGAINING POWER OF SUPPLIERS

– Threatening to raise price or lower the quality of goods or services supplied. – SUPPLIERS POSE A THREAT IF • • • • • •

Concentration of Suppliers – Few Suppliers and more buyers. The industry is not an important customer to the supplier. The suppliers product is an important input to the buyer’s industry. The supplier group’s products are differentiated. Switching cost is more. Supplier group poses a threat of forward integration.

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• RIVALRY AMONG EXISTING COMPETITORS

– Competing for position using tactics like – Price competition, advertising, product introduction, increased customer service. – Occurs with a sense of pressure or and opportunity to improve position. – Moves have magnified effect on the industry as a whole. – Price competition are highly unstable and once matched by rivals lower revenues for the industry. – Advertising battles will enhance the level of product differentiation to the benefit of all firms.

FIVE COMPETITIVE FORCES – MICHAEL PORTER

• RIVALRY AMONG EXISTING COMPETITORS – Contd.. – RIVALRY IS INTENSE IF • Rivalry will be more intense if there are lots of small or equally sized competitors. • Slower industry growth – Quest for market share. • Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed. • Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry. • Switching costs. Rivalry is reduced when buyers have high switching costs. • Capacities augmented in large increments to reach economies of scale. • Diverse competitors – Diverse firm competing with smaller firm. • If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely “milking" profits in a mature industry, the degree of rivalry is typically low. • Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.

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STRUCTURAL ANALYSIS AND COMPETITIVE STRATEGY

Knowing the forces affecting competition and their causes, firm can identify its strength and weakness relative to industry. • Strategy can be offensive or defensive to create a defendable position against the five competitive forces. • Few approaches are: • • •

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Positioning the firm so that its capability provides the best defense against the forces. Influencing the balance of forces through strategic moves, thereby improving firms relative position. Anticipating shifts in the factors underlying the forces and responding to them, thereby exploiting change by choosing a strategy appropriate to the new competitive balance before rivals recognize it. Setting diversification strategy by checking the potential of business in future.

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STRUCTURAL ANALYSIS AND INDUSTRY DEFINITION

Industry definition is a crucial step in competitive strategy formulation. • Structural analysis help reduce the need for debate on where to draw the industry boundary. • Definition of industry is a choice of where to draw a line between : • Established competitors and substitute products. • Existing firm and potential entrants. • Existing firms and Suppliers & Buyers. •

“The framework of structural analysis can be used to identify rapidly what are the crucial structural features determining the nature of competition in a particular industry.” THANK YOU