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STARTEGIC

MANAGEMENT-I
SESSION 5 & 6: EXTERNAL ANALYSIS/INDUSTRY
ANALYSIS

Rupanwita Dash
Assistant Professor, Strategic Management Area
Indian Institute of Management Lucknow
Fundamental question: Why firms differ in performance?

Why does average


performance differ Industry effect
across industries? Privileged Position

Why firms differ in


performance?

Why does average


performance differ Firm effect
across firms within the Privileged Resources
same industry?

2
INDUSTRY ANALYSIS: TOOLS

1. SWOT Analysis
2. SCP Paradigm
3. PEST Analysis
4. FIVE FORCES Framework
SWOT Analysis
HELPFUL HARMFUL

INTERNAL STRENGTH WEAKNESS

EXTERNAL OPPORTUNITIES THREATS


Industry Structure
Number of competing firms
Homogeneity of products FIVE FORCES
Cost of entry and exit

Structure-
Conduct-
Performance Firm Conduct
Paradigm Price taking
Product differentiation
Tacit collusion

Performance
Competitive advantage, Competitive parity,
Competitive disadvantage
Firm and it’s Environment

Government

Existing
Rivals FIVE FORCES
Customers
Competitive Environment/

Suppliers
FIRM Market Environment

Non-Market Environment
Potential
Rivals PEST
Exhibit 2.2,
government
page 44
FIVE FORCES Framework
Why does average performance differ across industries?

Bargaining
power of
suppliers

Bargaining
Threat of
Rivalry power of
new entry
consumers

Threat of
substitutes

7
Threat of new entrants: Structural drivers
• Economies of scale
• Product differentiation
• Brand identity/loyalty
• Switching costs
• Capital requirements
• Access to distribution channels
• Expected retaliation
• Absolute cost advantages
• Experience and learning effects
• Access to necessary inputs
• Proprietary low-cost product design
Bargaining power of suppliers: Structural drivers
• Uniqueness of supplier’s products or services (differentiation)
• Number of suppliers
• Size of suppliers
• Supplier concentration
• Importance of volume to supplier
• Availability of substitutes for the supplier’s products
• Switching cost for supplier’s products
• Impact of inputs on cost or differentiation
• Supplier’s threat of forward integration
• Industry threat of backward integration
• Supplier’s contribution to quality or service of the industry products
• Total industry cost contributed by suppliers
• Importance of the industry to supplier’s profit
Bargaining power of buyers: Structural drivers
• Buyer volume (number of customers)
• Buyer concentration
• Buyer’s switching costs
• Buyer’s ability to substitute
• Price sensitivity
• Brand loyalty
• Information availability
• Buyer’s threat of backward integration
• Industry threat of forward integration
Threat of substitutes: Structural drivers

• Relative price performance of substitutes


• Perceived level of product differentiation
• Switching costs
• Number of substitute products available
• Buyer’s propensity to substitute
Rivalry among existing competitors: Structural
drivers
• Industry growth
• Number of competitors
• Industry concentration
• Diversity of competitors
• Product differentiation
• Fixed costs
• Brand identity/loyalty
• Switching costs
• Barriers to exit
Process of Analysis: Five Forces
Template to systematically track factors for each forces
Scale (5 point) Scores Weight Remarks
Barriers to Entry xyz
Economies of scale Small Large 5
Product differentiation Low High 4
Brand identity Low High 4
Switching cost (for consumers) Low High 1
Access to channels of distribution Easy Limited 1
Capital requirement Small Large 2
Access to technology Easy Restricted 1
Access to raw material Easy Restricted 2

Bargaining Power of Suppliers abc


Availability of substitutes (of supplies) Few Many 3
Switching cost High Low 4
Supplier’s threat of forward integration High Low 2
Industry’s threat of backward integration Low High 3
Contribution to quality High Low 1
Contribution to cost High Low 1
Industry’s importance to supplier Low High 4
Rationale for analyzing industry structure
• Understand forces determining an industry’s profitability
• Economic intuition underlying impact of different forces on revenue
and/or cost, and hence average profits in an industry

• Helps guide managerial actions


• Determine own firm’s strategic position in current industry structure
• Decide whether to enter/exit industry
• Anticipate and exploit shifts in forces
• Devise strategies to influence industry structure (e.g., create entry
barriers, reduce bargaining power of buyers and suppliers)
Important issues in industry analysis
• Analyze average industry profitability at a point in time
• Average or representative firm in the industry and not one particular firm

• Clear definition of “industry” and perspective


• Focus on one stage of the industry supply chain; each stage has its own suppliers,
buyers, substitutes, rivals, and potential entrants
• Industry may have multiple buyers and suppliers; bargaining power may differ across
different buyers or different suppliers
• Be clear whether analysis is for incumbent firms or for potential entrants

• Some of the five forces may be more important than others


• Depends on assessment of the critical success factors in the industry based on the five
forces analysis
INDUSTRY ANALYSIS
• SWOT Analysis
• SCP paradigm
• PEST Analysis
• FIVE FORCES framework

• Strategic groups
• Blue ocean strategy
Key Takeaways
• Don’t enter an industry just because it is growing
• Analyze all the drivers of average industry profitability
• Understand how each parameter within a force affects an average firm’s revenue,
cost, or both, ceteris paribus

• Use five forces analysis to guide managerial actions that can change the
industry structure
• Mergers & acquisitions to reduce intra-industry rivalry
• Backward (forward) integration to reduce supplier (buyer) power
• Invest in advertising or R&D to increase barriers to entry

• Beware of substitutes! (and Complements)


• Seemingly unrelated product or business can reduce an industry’s profitability (e.g.,
Smartphones versus PCs; Amazon versus Walmart)
Thank You