INDUSTRY ANALYSIS: ANALYZING THE TASK ENVIRONMENT

An industry is a group of firms that produces a similar product or service, such as soft drinks or financial services. An
examination of the important stakeholder groups, such as suppliers and customers, in a particular corporation’s task
environment is a part of industry analysis.

Industry Analysis and Competition: Porter’s five forces

Industry analysis—also known as Porter’s Five Forces Analysis—is a very useful tool for business strategists. It is
based on the observation that profit margins vary between industries, which can be explained by the structure of an
industry.

The Five Forces primary purpose is to determine the attractiveness of an industry. However, the analysis also
provides a starting point for formulating strategy and understanding the competitive landscape in which a company
operates.

Porter’s Five Forces Analysis

The framework for the Five Forces Analysis consists of these competitive forces:

1. Industry rivalry (degree of competition among existing firms) - intense competition leads to reduced profit
potential for companies in the same industry
2. Threat of substitutes (products or services) - availability of substitute products will limit your ability to raise
prices
3. Bargaining power of buyers - powerful buyers have a significant impact on prices
4. Bargaining power of suppliers - powerful suppliers can demand premium prices and limit your profit
5. Barriers to entry (threat of new entrants) - act as a deterrent against new competitors
Industry Analysis and Competition
Competition within an industry is grounded in its underlying economic structure. It goes beyond the behaviour of
current competitors.

The state of competition in an industry depends upon five basic competitive forces. The collective strength of these
forces determines profit potential in the industry. Profit potential is measured in terms of long-term return on
invested capital. Different industries have different profit potential—just as the collective strength of the five forces
differs between industries.

Industry analysis as a tool to develop competitive strategy

Industry analysis enables a company to develop a competitive strategy that best defends against the competitive
forces or influences them in its favor. The key to developing a competitive strategy is to understand the sources of
the competitive forces. By developing an understanding of these competitive forces, the company can:

 Highlight the company’s critical strengths and weaknesses (SWOT analysis)

 Animate its position in the industry
 Clarify areas where strategic changes will result in the greatest payoffs
 Emphasize areas where industry trends indicate the greatest significance as either opportunities or threats

Industry Analysis and Structure

The five competitive forces reveal that competition extends beyond current competitors. Customers, suppliers,
substitutes and potential entrants—collectively referred to as an extended rivalry—are competitors to companies
within an industry.

The five competitive forces jointly determine the strength of industry competition and profitability. The strongest
force (or forces) rules and should be the focal point of any industry analysis and resulting competitive strategy.

Short-term factors that affect competition and profitability should be distinguished from the competitive forces that
form the underlying structure of an industry. Although these short-term factors may have some tactical significance,
analysis should focus on the industry’s underlying characteristics.

Industry Rivalry and Competition: Porter’s five Forces

Industry rivalry—or rivalry among existing firms—is one of Porter’s five forces used to determine the intensity of
competition in an industry.

Industry rivalry usually takes the form of jockeying for position using various tactics (for example, price competition,
advertising battles, and product introductions). This rivalry tends to increase in intensity when companies either
feel competitive pressure or see an opportunity to improve their position.

In most industries, one company’s competitive moves will have a noticeable impact on the competition, who will
then retaliate to counter those efforts. Companies are mutually dependent, so the pattern of action and reaction
may harm all companies and the industry.

Some types of competition (for example, price competition) are very unstable and negatively influence industry
profitability. Other tactics (for example, advertising battles) may positively influence the industry, as they increase
demand or enhance product differentiation.
Structural Factors Affecting Industry Rivalry
A number of structural factors can affect industry rivalry:

NUMEROUS OR EQUALLY BALANCED COMPETITORS

When there are many competitors, some companies believe that they can make competitive moves without being
noticed. When companies are relatively balanced in strength, they are more likely to engage in competitive battles
and attack and retaliate as they strive for market leadership.

SLOW INDUSTRY GROWTH

In a slow growth market, companies can only grow by capturing market share from each other, which leads to
increased competition.

HIGH FIXED OR STORAGE COSTS

High fixed costs create pressure for all companies to fill capacity, thus leading to price cutting when there is excess
capacity. High storage costs push companies to decrease prices to ensure sales.

LACK OF DIFFERENTIATION OR SWITCHING COSTS

When products are perceived as commodities, choice is often determined by price and service, which then leads to
increased competition in price and service.

CAPACITY INCREASED IN LARGE INCREMENTS

When economies of scale require large increases in capacity, it causes disruptions in the industry supply/demand
balance, which then leads to periods of overcapacity and price cutting.

DIVERSE COMPETITORS

Companies with diverse strategies, origins, personalities and relationships to parent companies (especially foreign
competitors) also have different competitive goals and strategies than “typical” companies within the industry. Their
diverse approaches to the market and unique competitive strategies can upset the status quo of doing business.

HIGH STRATEGIC STAKES

Companies with high stakes in achieving success may sacrifice profitability for expansion. Also, companies with high
market share may feel threatened by competitors seeking to reduce their market share.

HIGH EXIT BARRIERS

Economic, strategic and emotional factors can prevent companies from leaving the industry, even when they are
earning low or negative returns on investments. Major sources of exit barriers include:

 Specialized assets
 Fixed costs of exit
 Strategic interrelationships
 Emotional barriers
 Government and social restrictions
Industry Competition and Threat of Substitutes: Porter’s five Forces
Threat of substitutes (from Porter’s five forces analysis) occurs when companies within one industry are forced to
compete with industries producing substitute products or services.

Substitutes, Potential Returns, Profits and Competition

Substitutes limit an industry’s potential returns by placing a ceiling on the prices that firms within that industry can
charge to make a profit. As the price-performance alternative offered by substitutes becomes more attractive, it
becomes even more difficult for those firms to make a profit. Demand for substitutes can also reduce the demand
for industry products and services. Substitutes can create intense competition during normal economic times, and
reduce potential profit increases during positive economic times.

Identifying substitutes involves searching for other products or services that can perform the same function as the
industry’s product or service. Positioning an industry’s products or services against the substitutes may take place via
collective industry actions (for example, sustained advertising by industry participants).

Key substitutes

Substitute products that deserve the most attention include those:

 Subject to trends that improve their price-performance tradeoff with the industry’s product
 Produced by industries earning high profits - development increases competition in their own industries,
causing price reduction or performance improvement

Bargaining Power of Buyers: Porter’s five Forces

The presence of powerful buyers reduces the profit potential in an industry. Buyers increase competition within an
industry by forcing down prices, bargaining for improved quality or more services, and playing competitors against
each other. The result is diminished industry profitability.

The power of an industry’s important buyer groups depends upon:

 Characteristics related to its market situation

 The relative importance of its purchases from the industry as compared with its overall business

How to Assess the Power of a Buyer Group

The following conditions indicate that a buyer group is powerful:

 The buyer group is concentrated, or purchases large volumes relative to the seller’s sales
 Products purchased from the industry represent a significant percentage of the buyer’s costs or purchases
 Products purchased from the industry are standard or undifferentiated—alternative suppliers are easy to
find and competitors are played against each other
 Few switching costs exist (little penalty for moving to another supplier)
 Profits earned are low (greater incentive to reduce purchasing costs)
 Buyers pose a significant threat of backward integration—buyers demand concessions, and may engage in
tapered integration (producing some components in-house and purchasing the rest from outside suppliers)
 The industry’s product is not important to the quality of the buyer’s products or services
 The buyer has full information (their knowledge of demand, market prices and supplier costs provides them
with leverage)
Bargaining Power of Suppliers: Porter’s Five Forces
The presence of powerful suppliers reduces the profit potential in an industry. Suppliers increase competition within
an industry by threatening to raise prices or reduce the quality of goods and services. As a result, they reduce
profitability in an industry where companies cannot recover cost increases in their own prices.

Power of Supplier Group

The following conditions indicate that a supplier group is powerful:

 It is dominated by a small number of companies and is more concentrated than the industry to which it sells
 It is not required to contend with substitute products for sale in the industry
 The industry is not one of the supplier’s important customers
 Its products are an important part of the buyer’s business
 Its products are differentiated or there are built-up switching costs
 It poses a definite threat of forward integration

Barriers to Entry - Factors preventing startups from entering a market: Porter’s

Five Forces
Barriers to entry are factors that prevent a startup from entering a particular market. Factors involved as barriers to
entry may be either innocent (for example, the dominating company’s absolute cost advantage) or deliberate (for
example, high spending on advertising by incumbents makes it very expensive for new firms to enter the market.)

Barriers to entry act as a deterrent against new competitors. They serve as a defensive mechanism that imposes a
cost element to new entrants, which incumbents do not have to bear. Startups need to understand any barriers to
entry for their business and market for two key reasons:

1. Startups might seek to enter a business with high barriers to entry. Doing so would put the start-up at a
significant disadvantage that is difficult to overcome.
2. Startups that become market leaders must understand how to protect their position by building barriers to
entry.

Sources of Barriers to Entry into a Market

There are seven sources of barriers to entry:

ECONOMIES OF SCALE

These are declines in the unit costs of a product as the absolute volume per period increases. These force the
entrant to either come in at a large scale (risking strong reaction from incumbents) or a small scale (forcing a cost
disadvantage).

PRODUCT DIFFERENTIATION

Incumbents have brand identification and customer loyalties. This forces entrants to spend heavily to overcome
these loyalties. Startups may bring a different product to market, but its benefits must be clearly communicated to
the target customer. Startups must find an effective positioning, which often requires marketing resources beyond
their means.
CAPITAL REQUIREMENTS

These are the financial resources required for infrastructure, machinery, R&D and advertising. Startups may get
around capital requirements by outsourcing parts of the operation to companies that can leverage existing
investments.

SWITCHING COSTS

These are one-time costs the buyer faces when switching an existing supplier’s product to a new entrant (for
example, employee retraining, new equipment, and technical support).

ACCESS TO DISTRIBUTION CHANNELS

This can be a barrier if logical distribution channels have been locked up by incumbents.

COST DISADVANTAGES INDEPENDENT OF SCALE

Incumbents may have cost advantages that cannot be replicated by a potential entrant. Factors include the learning
or experience curve, proprietary product technology, access to raw materials, favorable locations and government
subsidies.

GOVERNMENT POLICY

Governments can limit or prevent entry to industries with various controls (for example, licensing requirements, and
limits to access to raw materials). Startups in highly regulated industries will find that incumbents have fine-tuned
their business according to regulation.

What response can new entrants expect?

The expected reaction of industry incumbents towards a new entrant influences the prospect or threat of entry by a
new competitor. A number of conditions indicate the likelihood of retaliation to entry:

 A history of strong retaliation to entrants

 Established firms with substantial resources to retaliate (for example, excess cash, distribution channel
leverage, and excess productive capacity)
 Established firms with commitment to the industry and highly illiquid assets
 Slow industry growth

http://www.marsdd.com/mars-library/industry-analysis-and-competition-using-porters-five-forces/
E-Commerce Industry

E-Commerce or Electronic commerce refers to use of the Internet to conduct business transactions. But it is
important here to distinguish the difference between e-business and ecommerce. E-commerce focuses on efficiency
in selling, marketing, and purchasing, while e-business focuses on effectiveness through improved customer, service,
reduced costs and streamlined business process E-business improves business performance by using electronic
information technologies and open standards to connect suppliers and customers at all steps along the value chain.
The analysis will be concentrated only in the buying and selling of products in the internet. In this industry are
present the following firms: Amazon.com, Yahoo.com, MSN, eBay, FNAC, and others. In this industry is being sold
products such as DVD’s, CD’s, PC’s, books, phones, mobiles, perfumes, bicycles, furniture, households articles,
watch’s, academic articles, clothes (for men, woman, and children), etc.

The amount of trade conducted electronically has grown extraordinarily since the spread of the Internet. A wide
variety of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer,
supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI),
inventory management systems, and automated data collection systems. Modern electronic commerce typically
uses the World Wide Web at least at some point in the transaction's lifecycle, although it can encompass a wider
range of technologies such as e-mail as well.

A large percentage of electronic commerce is conducted entirely electronically for virtual items such as access to
premium content on a website, but most electronic commerce involves the transportation of physical items in some
way. Online retailers are sometimes known as e-retailers and online retail is sometimes known as e-tail. Almost all
big retailers have electronic commerce presence on the World Wide Web.

Electronic commerce that is conducted between businesses is referred to as Business-to-business or B2B. B2B can be
open to all interested parties (e.g. commodity exchange) or limited to specific, pre-qualified participants (private
electronic market).
Electronic commerce is generally considered to be the sales aspect of e-business. It also consists of the exchange of
data to facilitate the financing and payment aspects of the business transactions.

According to Forrester Research, US online retail reached $175 billion in 2007 and is projected to grow to $335
billion by 2012. Business-to-consumer (B2C) e-Commerce continues its double-digit year-over-year growth rate, in
part because sales are shifting away from stores and in part because online shoppers are less sensitive to adverse
economic conditions than the average US consumer. Despite the continued growth of the channel, online retailers
face several challenges to growth: Online stores are broadly perceived as a second choice for shoppers, online retail
is becoming increasingly seasonal, and online shoppers rarely admit to browsing, which can drive valuable
incremental dollars during their Web shopping experiences.

An Analysis of Five Competitive Forces for This Industry

Threats of entrance of the new enterprises

The industry is very attractive. There are not significant barriers to entry on industry, because perhaps the firms of
the industry have adopted a diversification strategy of sell, the products available to customers are not very
differentiated.

Rivalry among Existing Firms

It is strong; there are divers firms in the industry, such as eBay, Yahoo, MSN, FNAC, etc. This industry is growing, and
the products that are being sold are not very differentiated. Some of the firms try to differentiate themselves by
adding some competitions, blogs & a nice shopping for the customer to make him spend more time at the site.

Bargaining power of Buyers

It is strong, because it is easy to find other supplier in the industry. They have no loyalty to the brand. They look for
cheap & better products. They are also provided with lots of options in the industry.

Bargaining Power of Suppliers

In general level, it is low, because the products existing in this industry are sold by many firms. In case of products
like Books, DVD’s and CD’s the bargaining power of suppliers is low, caused by existence of many suppliers in the
Industry. Firms like Microsoft due to their position in the software product market, we can say that their bargaining
power as supplier of firms that sells products like Office, for example is strong, perhaps to have others firms in the
industry.

Threats of substitute products or services

In general, it is easy to sell in the internet, so, there are threats of substitute products or service in the e-commerce
industry. There are threat of substitute products, by fact of products sold in the industry could be sold by others
firms that are inside or outside of industry, for example, if the buyer do not get satisfied with price of a DVD or Book
supplied by Amazon.com, for example, these can choice to buy other product that is being sold by another firm that
belongs or not this industry, to a price more low.

https://www.scribd.com/doc/7752131/Five-Competitive-Forces-of-e-Comerce-Industry
Porter’s Five Forces in Action: Sample Analysis of Coca-Cola

The following is a Five Forces analysis of The Coca-Cola Company in relationship to its Coca-Cola brand.

Threat of New Entrants/Potential Competitors: Medium Pressure

 Entry barriers are relatively low for the beverage industry: there is no consumer switching cost and zero
capital requirements. There is an increasing amount of new brands appearing in the market with similar
prices than Coke products
 Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant market share for a
long time and loyal customers are not very likely to try a new brand.

Threat of Substitute Products: Medium to High pressure

 There are many kinds of energy drink s/soda/juice products in the market. Coca-Cola doesn’t really have an
entirely unique flavor. In a blind taste test, people can’t tell the difference between Coca-Cola and Pepsi.

The Bargaining Power of Buyers: Low pressure

 The individual buyer no pressure on Coca-Cola

 Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining
power is lessened because of the end consumer brand loyalty.

The Bargaining Power of Suppliers: Low pressure

 The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and caffeine. The
suppliers are not concentrated or differentiated.
 Coca-Cola is likely a large, or the largest customer of any of these suppliers.

Rivalry among Existing Firms: High Pressure

 Currently, the main competitor is Pepsi which also has a wide range of beverage products under its brand.
Both Coca-Cola and Pepsi are the predominant carbonated beverages and committed heavily to sponsoring
outdoor events and activities.
 There are other soda brands in the market that become popular, like Dr. Pepper, because of their unique
flavors. These other brands have failed to reach the success that Pepsi or Coke has enjoyed.

http://valuationacademy.com/porters-five-forces-in-action-sample-analysis-of-coca-cola/
Example of Porter's Five Forces
There are several examples of how Porter's Five Forces can be applied to various industries online. As an example,
stock analysis firm Trefis looked at how Under Armour fits into the athletic footwear and apparel industry.

Competitive rivalry
 Under Armour faces intense competition from Nike, Adidas and newer players.
 Nike and Adidas, which have considerably larger resources at their disposal, are making a play within the
performance apparel market to gain market share in this up-and-coming product category.
 Under Armour does not hold any fabric or process patents, and hence its product portfolio could be copied
in the future.

Bargaining power of suppliers

 A diverse supplier base limits bargaining power.
 In 2012, Under Armour's products were produced by 27 manufacturers located across 14 countries. Of
these, the top 10 accounted for 49 percent of the products manufactured.

Bargaining power of customers

 Under Armour's customers include both wholesale customers as well as end customers.
 Wholesale customers, like Dick's Sporting Goods and the Sports Authority, hold a certain degree of
bargaining leverage, as they could substitute Under Armour's products with other competitors' to gain
higher margins.
 Bargaining power of end customers is lower as Under Armour enjoys strong brand recognition.

Threat of new entrants

 Large capital costs are required for branding, advertising and creating product demand, and hence this limits
the entry of newer players in the sports apparel market.
 However, existing companies in the sports apparel industry could enter the performance apparel market in
the future.

Threat of substitute products

The demand for performance apparel, sports footwear and accessories is expected to continue, and hence we think
this force does not threaten Under Armour in the foreseeable future.

http://www.businessnewsdaily.com/5446-porters-five-forces.html
Porter's 5 Forces and the Banking Industry

Threat of New Entrants

Despite the regulatory and capital requirements of starting a new bank, between 1977 and 2002 an average of 215
new banks opened each year according to the FDIC1. With so many new banks entering the market each year the
threat of new entrants should be extremely high. However, due to mergers and bank failures the average number of
total banks decreases by roughly 253 a year2. A core reason for this is, what is arguably, the biggest barrier of entry
for the banking industry, trust.

Because the industry deals with other people's money and financial information new banks find it difficult to start
up. Due to the nature of the industry people are more willing to place their trust in big name, well known, major
banks who they consider to be trustworthy.

The banking industry has undergone a consolidation in which major banks seek to serve all of customers financial
needs under their roof (this can clearly be seen in the business model of banks like Wells Fargo's). This consolidation
furthers the role of trust as a barrier to entry for new banks looking to compete with major banks, as consumer are
more likely to allow one bank to hold all their accounts and service their financial needs.

Ultimately the barriers to entry are relatively low for the banking industry. While it is nearly impossible for new
banks to enter the industry offering the trust and full range of services as a major bank, it is fairly easy to open up a
smaller bank operating on the regional level.

Power of Suppliers

Capital is the primary resource on any bank and there are four major suppliers (various other suppliers [like fees]
contribute to a lesser degree) of capital in the industry.

1. Customer deposits. 2. Mortgages and loans. 3. mortgage-backed securities. 4. Loans from other financial
institutions.

By utilizing these four major suppliers, the bank can be sure that they have the necessary resources required to
service their customers' borrowing needs while maintaining enough capital to meet withdrawal expectations.

The power of the suppliers is largely based on the market, their power is often considered to fluctuate between
medium to high.
Power of Buyers

The individual doesn't pose much of a threat to the banking industry, but one major factor affecting the power of
buyers is relatively high switching costs. If a person has one bank that services their banking needs, mortgage,
savings, checking, etc., it can be a huge hassle for that person to switch to another bank.

To try and convince customers to switch to their bank they will often times lower the price of switching, though most
people still prefer to stick with their current bank?

The internet has greatly increased the power of the consumer in the banking industry. The internet has greatly
increased the ease and reduced the cost for consumers to compare the prices of opening/holding accounts as well as
the rates offered at various banks.

ING Direct introduced high yield savings accounts to catch the buyers' attention, then they went a step further and
made it very easy for customers to transfer their money from their current bank to ING. ING was successful in their
attempt because they managed to make switching costs very low in terms of time and capital.

Availability of Substitutes

Some of the banking industry's largest threats of substitution are not from rival banks but from non-financial
competitors.

The industry does not suffer any real threat of substitutes as far as deposits or withdrawals, however insurances,
mutual funds, and fixed income securities are some of the many banking services that are also offered by non-
banking companies.

There is also the threat of payment method substitutes and loans are relatively high for the industry. For example,
big name electronics, jewelers, car dealers, and more tend to offer preferred financing on "big ticket" items. Often
times these non-banking companies offer a lower interest rates on payments then the consumer would otherwise
get from a traditional bank loan.

Competitive Rivalry

The banking industry is considered highly competitive. The financial services industry has been around for hundreds
of years and just about everyone who needs banking services already has them. Because of this, banks must attempt
to lure clients away from competitor banks. They do this by offering lower financing, higher rates, investment
services, and greater conveniences than their rivals. The banking competition is often a race to determine which
bank can offer both the best and fastest services, but has caused banks to experience a lower ROA (Return on
Assets). Given the nature of the industry it is more likely to see further consolidation in the banking industry. Major
Banks tend to prefer to acquire or merge with other banks than to spend money marketing and advertising.

https://sites.google.com/site/bankingindustryandtheinternet/home/5-forces
Porter’s Five Forces Analysis for IKEA
IKEA is a Swedish company that sells furniture and home accessories. The furniture is modern and ready to
assemble. As of 2008, it was the biggest retailer of furniture in the world. It was created in 1943 by 17 year old Ingvar
Kamprad. In addition to simplistic furniture design and eco-friendly solutions, the company is known to control costs,
focus on operational details and efficiency and a continuous focus on new product development. This strategy has
allowed the company to maintain its low costs over the years. At present, there are 349 IKEA stores in 43 countries.

Competitive Rivalry

There is significant competition in the discount furniture market with companies like Ashley Furniture Home Stores,
Home Depot or other local players. But IKEA has managed to create a clear differentiated position in the market and
remains the global market leader in its industry.

Threat of new Entrants

There is little threat from new entrants. The requisite expertise is difficult to replicate and financial investments are
significantly high. In addition the market is saturated enough with the existing players that there is little attraction
for a competitor large enough to threaten IKEA’s position.

Threat of Substitutes

There is little threat of substitutes as the target market for IKEA is unlikely to switch to higher end more classic styles
of furniture. There are not many alternates that offer the breadth of options that are available at IKEA.

Bargaining Power of Buyers

There is enough competition in the market to afford some power to the buyers in the industry. Since IKEA has built
up its USP with its competitive prices, customers can choose to switch if there is any increase in the prices. There is
little switching cost, though loyalty may be a factor that prevents a switch.

Bargaining Power of Suppliers

Suppliers do not have substantial bargaining power as there many options available to IKEA around the world. There
are numerous factories that have the requisite expertise to partner with IKEA. Despite this IKEA attempts to firm
long term strategic partnerships with suppliers which benefits both supplier and the firm.

http://www.entrepreneurial-insights.com/porters-five-forces-model-strategy-framework/
Understanding the tool
These forces determine an industry structure and the level of competition in that industry. The stronger competitive
forces in the industry are the less profitable it is. An industry with low barriers to enter, having few buyers and
suppliers but many substitute products and competitors will be seen as very competitive and thus, not so attractive
due to its low profitability.

http://www.strategicmanagementinsight.com/tools/porters-five-forces.html

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Ihab Genedi