Understanding External Environment,

Industry Structure

1
Understanding Industry Structure

2
 Environment Analysis
 Effect of Environment

3
1|4
1|5
1|6
1|7
1|8
1|9
1 | 10
1 | 11
1 | 12
1 | 13
1 | 14
A Print Advertisement by a famous Cola Company
Understanding Industry Structure

16
Why it is Necessary to Understand
Industry Structure?

17
 Understanding Industry Structure
 Why it is Essential
 Cope with competition

 Each industry has distinct structure

 Automobile, healthcare, airlines, textiles, steel etc

 It reveal the root of profitability.

18
 Strategy: the Link between the
Firm and its Environment

THE FIRM THE

• Goals &
INDUSTRY
Values ENVIRONMENT
STRATEGY
STRATEGY
• Resources & • Competitors
Capabilities • Customers
• Structure & • Suppliers
Systems
 Porter’s Framework of Competition
 Framework

20
 Porter’s Framework of Competition
 Detailed Analysis: Industry Structure

21
 Understanding Industry Structure
 Forces that Shape Competition: Threat of New Entrant
 The sources of barrier to entry

22
 Understanding Industry Structure
 Forces that Shape Competition: Threat of Entry
 The seven sources of barrier to entry
 Supply side economics of scale: fixed cost, efficient technology, better term with
suppliers, research, production, consumer marketing.
 Demand side benefits: Network effect: IBM, e-Bay, Microsoft.
 Customer switching cost: Computer networking
 Capital Requirement: Mining industry
 Incumbency advantage independent of size – Access to technology, raw
material source, government subsidies, favourable geographic location.
 Unequal access to distribution channel: Food industry; disruption caused by low
cost airlines, A new manufacturer may find it difficult to find new distribution
channel.
 Restrictive government policies
 Incumbent power: Old players can create life more difficult for new entrants.
 Product Differentiation: Late entrants needs to spend higher amount on
advertisement.
 Governmental and Legal Barriers: Patents can create issues for new entrants.

23
 Understanding Industry Structure
 Forces that Shape Competition: Supplier Power
 A Supplier Group is Powerful

24
 Understanding Industry Structure
 Forces that Shape Competition: Supplier Power
 A Supplier Group is Powerful
 Supplier can raise price to lower profitability: Microsoft
 It is more concentrated than the industry it sells to: Microsoft
 Higher switching cost: Bloomberg Terminal
 Highly specialized product: Drugs
 Absence of substitute product : Pilot Union for Airlines
 Supplier can easily forward integrate to new industry: Samsung
 Supplier group does not depend heavily on the industry.

25
 Understanding Industry Structure
 Forces that Shape Competition: Buyer Power
 A Customer Group is Powerful

 A Customer Group is Price Sensitive

26
 Understanding Industry Structure
 Forces that Shape Competition: Buyer Power
 A Customer Group is Powerful
 Bulk Buyer: Chemical Industry
 Standardized product: Federal Express
 Less switching cost: Can making by Beer Manufacturer
 Size and concentration of buyers relative to supplier. Examples being HMO for
hospitals.
 Buyers Information. Example is trade secret.
 Ability to integrate vertically. Example being backward integration: Cold Drinks
and Bottling plant.

 A Customer Group is Price Sensitive

 The input cost is very high for the customer (Beverage and Aluminium Can)
 The customer industry profit margins are lower
 The quality of product is not affected by vendor input.
 Critical input for the customer: Chips for computer industry.
 Intense competition among the buyers. Example is automobile.
 27
The less differentiated product for buyers. Example being T-Shirt for Wal-Mart.
 Understanding Industry Structure
 Forces that Shape Competition: Threat of Substitute


28
 Understanding Industry Structure
 Forces that Shape Competition: Threat of Substitute
 Lower the profitability

 New entrants diversifying from other markets: Internet browser by

Microsoft

 Substitute Can Be: Functional, Wallet and Psychological



29
 Understanding Industry Structure
 Forces that Shape Competition: The Threat of
Substitute
 Extreme Example
 No Substitute:
 Lots of Substitute:

 Examples of Substitute
 Video Conferencing:
 Postal Letter:
 Sugar:
 Long Distance Calls:

 Substitutes Demand Strategic Action

 They improve price performance trade-off
 It is produced for industries with very high profit margin.

30
 Understanding Industry Structure
 Forces that Shape Competition: Rivalry Among
Existing Competitors
 Competition Gravitates to Price if:

 Intense Competition

31
 Understanding Industry Structure
 Forces that Shape Competition: Rivalry Among
Existing Competitors
 Competition Gravitates to Price if:
 Lack of differentiation and less switching cost.
 Higher fixed cost.
 High capacity investment need.
 Perishable product.

 Intense Competition
 Large number of companies of similar size
 Slow industry growth
 Higher exit barriers
 Rivals are highly committed to business, but have diverse approaches, origin
and personalities.

32
 Understanding Industry Structure
 Changes in Industry Structure (Internal Forces)
 Shifting Threat of New Entry
 Expiration of patent
 Competition for limited space with retailers for ice-cream industry.
 Role of technology in retail business.

 Changing Supplier and Buyer Power

 Shifting Substitution Threat

 Micro-oven and conventional oven.
 Pen Drive and Hard Drive

 New Bases of Rivalry: Everything becomes commodity in long run.

33
 Extending Five Forces Framework
 Complements: A missing Force in the Porter Model
 Substitute: Decreases the value
 Complement: Increases the value of product

34
 Understanding Industry Structure
 Implication for Strategy
 Positioning in the Industry
 PACCAR Truck

 Exploiting Industry Change

 Dell Computer
 Apple iTunes website

 Shaping Industry Structure

 Intel

 The Role of Complementary Product and Services

 Car and Gasoline

35
 Extending Five Forces Framework
 Does Industry Matter
 It appears that industry environment is a relatively minor determinant of
a firm’s profitability. Studies of the sources of inter-firm differences in
profitability have produced very different results (see Table 4.1)—but
all acknowledge that industry factors account for a minor part (less
than 20%) of variation in return on assets among firms

36
 Segmentation Analysis
 Segmentation
 Use of Segmentation
 Initially it may be convenient to define industries broadly, but for a more detailed
analysis of competition we need to focus on markets that are drawn more
narrowly in terms of both products and geography. This process of
disaggregating industries into specific markets we call segmentation.

37
 Segmentation Analysis
 Stages in Segmentation Analysis
 1 - Identify Key Segment Variable and Categories
 Identify possible segmentation variables. Raw material, can design, can size,
customer size, customer’s industry, location.

 Reduce the number of segmentation variables. Which are most significant?

Which are closely correlated and can be combined? Type of can, customer
industry, customer location.

 Identify discrete categories for each segmentation variable. Type of can: steel
three-piece, steel two-piece, aluminum two-piece, general cans, composite
cans, aerosols. Type of customer: food processing, fruit juice, pet food, soft
drink, toiletries, beer, oil; Location: France, Germany etc..

38
 Segmentation Analysis
 Stages in Segmentation Analysis
 2 - Construct a segmentation matrix.

 3 Analyze segment attractiveness. Apply five forces analysis

to individual segments.

 4 Identify key success factors in each segment. Within each

segment, how do customers choose, and what is needed to
survive competition?

 5 Analyze attractions of broad versus narrow segment scope.

 What is the potential to share costs and transfer skills across segments?
 How similar are key success factors between segments?
 Are there benefits of segment specialization?

39
 Segmentation Analysis
 Stages in Segmentation Analysis

40
 Segmentation Analysis
 Strategic Groups
 All about Strategic Groups
 Whereas segmentation analysis concentrates on the characteristics of markets
as the basis for disaggregating industries, strategic group analysis segments an
industry on the basis of the strategies of the member firms. A strategic group is
“the group of firms in an industry following the same or a similar strategy along
the strategic dimensions.”

 In general, the proposition that profitability differences within strategic groups

are less than differences between strategic groups has not received robust
empirical support.

 Strategic group analysis is very useful in identifying strategic niches within an

industry and the strategic positioning of different firms; it is less useful as a tool
for analyzing interfirm profitability differences.

41
Segmentation Analysis

42