INDUSTRY ANALYSIS

Part of chapter 9
 Over long run-
Why is profitability of one industry different from another?

Strength of Competitive forces

Forces are strong Industry profitability will be low
Forces are weak Industry profitability will be high
 DEMAND CONDITIONS

1. Growing demand
(capacity utilization increasing)

2. Stagnant demand
(capacity utilization unchanged)

3. Declining demand
(capacity utilization decreases/situation of overcapacity)
 COMPETITIVE STRUCTURE

1. Concentrated/consolidated industries

2. Fragmented industries

3 firm Concentration ratio

Is sum of market shares of largest 3 firms in the industry

Firms Market share

Number of firms X ( eg – 20)
Largest firm – market share 30%
2nd largest firm – market share 20%
3rd largest firm – market share 10%
C3 ratio 60%

Measures
Concentrated C3 ratio – more than 50%
Dominant firms present

Fragmented C3 ratio – less than 50%

Dominant firms absent
 DIVERSITY

1. Firms are similar

(Type of Rivalry is – price rivalry)

2. Firms are different

(Type of Rivalry is – non price rivalry)
 US CLOUD SERVICES INDUSTRY- 2022

It is a concentrated industry -top 3 producers market share are Amazon @

32%, Microsoft @ 20% and Google @ 9%.

Industry has a large turnover of $ 500 billion is expected to grow @ 25% per
annum.

The business model is based on subscriptions-Buyers can rent ‘data storage

capacity’ as a service or rent ‘software’ as a service & pay monthly
subscriptions.

Competitors offer the same servers -same software - at similar subscriptions.

Q-How would you characterize the rivalry in this industry?

 QUESTION

Does rivalry change from time to time?

 STEEL INDUSTRY

Cyclical industry

Year X

Concentrated industry
Growing demand
Low diversity – all competitors sell to same quality standard

Year Y

Concentrated industry
Demand declines – leads to overcapacity
Low diversity- all competitors sell to same quality standard
 BARGINING POWER OF SUPPLIERS

Bargaining power of suppliers

(can be high or low)

Steel industry Car industry Consumers

B2B

High Suppliers do not negotiate – sell product at standard price &

standard terms on quality /service

Low Suppliers ‘negotiate’ – sell product with discounts &/or

special terms on quality/service
 BARGAINING POWER OF SUPPLIERS

To be high – what conditions need to be present?

a) Number of buyers- Many

b) Size of buyers – buys in small quantities

c) Product Differentiation – high

d) Dependency – low (Divert goods to other industries)

e) Switching cost – high ( due to contracts or loyalty programs)

f) Number of suppliers – choice exists

Q- What happens if the important conditions are reversed?

 BARGAINING POWER OF SUPPLIERS

Steel industry

Indian car industry consists of 18 car manufacturers.

All car manufacturers place large orders on suppliers.

All Orders are annual contracts

There are 10 large steel suppliers competing in the Indian market.

All steel suppliers supply to the same quality standards.

Car industry buys 70% of coil production of the steel industry

Q-How would you characterize bargaining power of suppliers?

 BARGINING POWER OF BUYERS

Steel industry Car industry Consumers

Bargaining power of buyers

(can be high or low)

High Industry ‘negotiates’ – sell product with discounts &/or

special terms

(usually in B2B situations)

Low Industry does not negotiate – sell product at standard price

& standard terms

(usually in B2C situations and B2 SME situations)

 BARGAINING POWER OF BUYERS

To be high- what conditions need to be present?

a) Number of buyers – Few

b) Size of buyers – large orders

c) Product Differentiation – low ( products are similar)

d) Switching cost – low (no contracts or loyalty programs)

e) Number of suppliers – choice exists

Q- What happens if important conditions are reversed?

 BARGAINING POWER OF BUYERS

There are millions of small car buyers.

Buyers can freely choose any brand.

Car manufacturers have strong brands

Q-How would you characterize bargaining power of car buyers?

 PRESSURE OF SUBSTITUTE PRODUCTS
Substitute products -They satisfy the same need

What problems do substitute products create?

a) Eat into demand

Eg- soft drinks

Juices-sports drinks – flavored water- cold coffee etc.

b) Limit price that can be charged

Eg- soft drinks priced with reference to alternatives

When do these problems become serious?

a) Many close substitutes are available

b) When substitute product offers superior value- in terms of price

performance ratio
 PRICE/PERFROMANCE RATIO
OF SUBSTITUTE PRODUCTS

Consider a ‘can manufacturer’

He can select either steel or aluminum as raw material to make cans.

Steel is cheaper @ Rs 50,000/ton whereas Aluminum is more expensive @ Rs

1,00,000/ton

Aluminum is lighter than steel and can give 1,00,000 cans/ton whereas steel
can give 25,000 cans/ton.

Q- Which raw material should he select?

Cost per can

Steel

Aluminum
 THREAT OF NEW ENTRANTS

What is the threat?

Easy to enter More crowded – more rivalry
Difficult to enter new entrants do not enter – rivalry unaffected

When is it high?
Capital requirement

high Difficult to enter

Economies of scale
high Difficult to enter
Proprietary technology
-Secret technology Difficult to enter
-Patents

Product Differentiation
Strong brands Difficult to enter
Access to distribution channels
New entrant Existing players monopolize shelves in retail stores

New entrant will find it Costly to get access to retailers

Government policies

May prevent entry into market

 QUESTION

Aircraft industry-
Has only 2 players for large jets – Boeing & Airbus

Q-Why new entrants do not enter?

 AIRLINE INDUSTRY, USA

1. RIVALRY

The domestic US airline industry is an oligopoly of 5 airlines -United Airlines,

American Airlines, Delta, Southwest , Jet Blue

Airlines fly to same places from same airports at about the same prices in
same ‘cramped up’ seats.

There are hundreds of routes/day -on some routes demand equals capacity
whereas other routes have overcapacity. Over capacity leads to price wars.

In addition, it is a cyclical industry -Some years the demand is more than

capacity & some years it is less than capacity.

2. BARGAINING POWER OF BUYERS

Millions of passengers fly every year on domestic sector.

Most buyers do not book seats directly from airlines or travel agents – they go
to third party web sites -compare prices and book the lowest cost option which
fits into their schedules.

All airlines offer loyalty programs- to prevent customers from switching

airlines. However all loyalty programs are similar & Buyers enroll on
multiple loyalty programs-to ensure that miles do not go in waste.
 3. BARGAINING POWER OF SUPPLIERS

Fuel, labor, aircraft are big three of expenditure.

Oil companies are cartelized unilaterally change prices based on global

demand supply conditions.

Labor unions are strong & keep demanding higher wages.

Aircraft manufacturers are only 2 – Boeing & airbus and they have long term
contracts with airlines.

4. THREAT OF NEW ENTRANTS

This is a capital intensive industry with well-established competitors.

5. PRESSURE OF SUBSTITUTE PRODUCTS

For long distance travel air is the fastest and most convenient form of
transport. For short distance transport trains and cars are close substitutes &
many travelers prefer to use them.

6. QUESTION

How attractive is this industry?

ASSESSING COLLECTIVE STRENGTH OF 5 FORCES

 Entry
barriers

high

Supplier power Rivalry Buyer power

High Low
High

Substitute
products

moderate

Overall strength of 5 forces

Do not take average
Give maximum weightage to most important force/forces

high