You are on page 1of 26

Mithil Gandhi

gandhi.mithil@gmail.com
+91 9819066954

Introduction to Industry Analysis

Porters Five forces framework

Hindalco Discussion

HBS (CC&S) case

Mission &
Vision

Strategy
Formulation

Internal
Analysis

Macro
Environment

Industry
Analysis

Risks &
Opportunities
Analysis
Macro Analysis

Country
Competitiveness
Analysis

Environmental
Analysis

Region
Micro Analysis

Industry Analysis

A set of factors that directly influences a company and its


competitive actions and responses.

Interaction among these factors determine an industrys


profit potential.

A framework to Analyze must,


Identify current and potential competitors and determine which firms
serve them.
Conduct competitive analysis.
Recognize that suppliers and buyers can impact profitability in the
business
Recognize that producers of potential substitutes may become
competitors.

The Five Forces model of Porter is an outsideoutside-in


business unit strategy tool that is used to make
an analysis of the attractiveness (value...) of an
industry structure.

It captures the
competition.

Porters video

key

elements

of

industry

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining

New Entrants bring new capacity, desire to gain market share


& Substantial resources

Prices down; Incumbents cost inflation & reducing Profitability

Two Important Factors:


Barriers to Entry
Expected Retaliation from Existing Competitors

Entry Barriers

Economies of scale
Product Differentiation
Capital requirements
Switching costs
Access to distribution channels
Absolute advantages

Expected retaliation

Economies of Scale:
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
Examples: Automobile (Maruti 800)
Entire Functional Area or Particular Operations
Diversification into the related area

Capital Requirements
Large Financial Resources requirement
Capital in terms of Production Facilities, Customer credit, Inventories, or
covering start-up losses
Examples: Oil & Gas industry

Differentiation:
Brand Identification and Customer Loyalties
Basis of Past Advertising, Customer Service, Product Differences or being
first into Industry
Entrants to spend heavily to overcome existing customer Loyalties
Example: Mineral Water market (Bisleri)

Switching cost:
One time costs facing the buyer of switching from one suppliers product
to another
Example: Telecom industry in the US

Access to distribution channel:


Example: FMCG products for bottom of pyramid

Absolute Advantages

Proprietary product knowledge (Pharma)


Favorable Access to Raw Materials (Aluminium industry)
Favorable Locations (Shipbuilding)
Government Policies (BTG sector)

Reaction of Existing Competitors


A history of vigorous retaliation
Established firms with substantial resources to fight back
Firms with great commitment to industry

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining

Intensity of Rivalry Among Existing Competitors


Rivalry Occurs because one or more competitors either feels the pressure
or sees the opportunity to improve position
Price Competition are highly unstable & leave industry worse off from
profitability standpoint
Advertising Battles well expand the demand or enhance levels of product
differentiation for betterment

Numerous or Equally Balanced Competitors


Numerous Firms
Relatively Few firms & Relatively balanced
Domination by one or very few firms

Slow Industry Growth


High competition for Firms seeking expansion
More Volatile than rapid growth markets

High Fixed or Storage Costs


Strong pressures for firms to fill capacity
Rapid Price Cutting
Product once produced is very difficult or costly to store

Lack of Differentiation or Switching Costs


Commodity based implies buyer is largely based on price and service
Result is Intense Price & Service Competition

Diverse Competitors:
Diversity in goals lead to different strategies for competing
No set of Rules of the Game

High Strategic Stakes:


High Stakes in achieving success leads to greater Rivalry
MNCs Foray into new countries & markets
Corporate Strategy Fit

High Exit Barriers;

Specialized Assets
Fixed Costs of Exit
Strategic Interrelationships
Emotional Barriers
Government & Social Restrictions

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining

Limit the Profit Potential

Products that can perform the same FUNCTION

Substitute Products:
Are Subject to trends improving the Price Performance Trade Off with
Industrys Product
Are produced by Industries earning high Profits

Examples: Steel Aluminum Plastic,

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining










Purchases large volumes relative to seller sales


Product represents significant fraction of buyers cost
Product are standard or undifferentiated
Few switching costs
Earns Low Profits
Buyers pose threat of backward integration
Industrys product is unimportant to quality of buyers
products or services
Buyer has full Information

Suppliers
Power of
Bargaining

Threat of
substitute

Industry
Rivalry

Threat of
new
Entrants

Buyers
power of
Bargaining







Dominated by few players


No substitute products available
Industry not important customer of supplier group
Suppliers product is an important input to buyers business
Suppliers groups products are differentiated or high
switching costs
Credible threat of Forward Integration

Positioning:
For the positioning your company within the industry
Helps answer questions like: why are prices low/high? Can we reduce input
costs?
Helps you locate where industry forces are weaker, and build a compelling
offering for that space
Today & tomorrow

Exploiting Industry Change:


Taking advantage of / defending against shifting forces & factors
Eg. Barriers of entry may change in multi-brand large format retail
because of government regulation

Shaping Industry Structure:


Re-dividing industry profits by stealing from other forces
Growing the overall profit pool

Define the scope of the industry


Start with the buyer; what products are in the industry ? What are not ?
What are the geographic scope ?

Analyze each force thoroughly


Use checklist for drivers
Try to quantify eg. Buyer force is strong if the product price is a large
fraction of the buyers cost
Asses each force as weak/medium/strong
For each force, also forecast any likely changes

Final Analysis
Rate the overall attractiveness of the industry high/medium/low
Repeatedly ask yourself what-if seek out different hypothetical positions
to see if they fit with your companys needs and capabilities
Make the final decision market entry / exit /investment / integration