Chapter-2 (Part 2) Industry and Competition Analysis

Content of Industry and Competition Analysis: Industry Setting,

Structure, Attractiveness, Performance and Practices. Forces Shaping
Competition, Experience curve and its limitations, Competitor Analysis.

I) Industrial Analysis:
An industry is defined as a group of organizations that offers a similar product or
class of products that are close substitute of each other. It can be defined at broad
level or segment level. E.g. automobile industry, at first level, includes all products
while at second level, we can divide in different product as per their functions like;
commercial vehicles, passenger car, two wheelers etc.., at third level select the
different form of product, and lastly its includes the organization which are producing
the same product.

• The industry analysis include the following factors:

1. Industry Setting
2. Industry Structure
3. Industry Attractiveness
4. Industry Performance
5. Industry Practices

1. Industry Setting
Industry setting deals with the pattern of industries in terms of their stage of
evolution and maturation as well as geographical dimension.
On the basis of these, porter has classified following five categories of industries.
Fragmented industries
Emerging industries
Maturing Industry
Declining Industry
Global Industry

1. Fragmented industries
It is one which is scattered at numerous places with each place with each place
serving the local markets. There may be number of players in the industry.
Production techniques is mostly non-mechanized, expansion of the industry beyond
certain geographical area poses problems. Industry players cater to a small area, their
competitive advantage has narrow potential to reap large amount of benefits.

2. Emerging industries
An emerging industry is one where market for product/s exists in latent form and
it materializes later. In fact, most of the industries at one point of time, have been
emerging ones.
E.g. computer industry
 In emerging industry, buyer preferences scatter evenly and a company may have
three options: 1. New product can be designed to meet the preferences of the one part
of the market. 2. Two or more products can be lunched simultaneously for two or
more parts of the market. 3. The new product can be designed for the middle of the
market.

3. Maturing Industry
Growth occurs in an industry over the period of time which ultimately leads to the
maturity. When growth occurs in the industry, it attracts many competitors and they
cover the entire market segments. Since growth rate of industry does not match the
growth rate of competitors, they focus on cutting the market shares of each other
through various tools of differentiation and competitive advantages.
E.g. in India, the growth rate of Oral care product is much lower than the size of
expansion of different competitors.

4. Declining Industry
After the maturity of an industry, it may start showing declining trend in its total
market size. This may happen either because of decline of society’s needs for the
product or availability of substitute product or both.
E.g. for washing cloth, oil-based laundry soaps – synthetic-based washing system.
When the new product emerges as a substitute to an old product, a fresh cycle begins.
No additional differentiation and competitive advantage.
Many of them prefer either to leave or come out with emerging product.

5. Global Industry
A global industry is one in which the strategic position of competitors in major
geographic or national markets are fundamentally affected by their overall global
positions. A global firm operates in more than one country offering similar
product/s and enjoys certain competitive advantages over domestic competitors. This
is so because of differentiation based on cost, quality, product features, brand image
or other features.

2. Industry Structure
Industry structure means the underlying economic and technical forces operating in
an industry. It consists of the nature of competition based on number of competitors
and their roles and product differentiation.
When number of sellers and type of product differentiation are combined together,
there are five types of industry structure:
• Pure Monopoly
• Pure Oligopoly
• Pure Competition
• Differentiated Oligopoly
• Monopolistic Competition
 Industry Structure

1. Pure Monopoly
Pure monopoly is characterized by the situation in which there is only one seller in
the market. Therefore, the organizations itself decide the marketing condition and its
performance. For organization to continue as a monopoly in the long run there must
be factors which prevent the entry of other organizations in the field. No
differentiation is needed.
E.g.: Indian Railway, State Electricity Board

2. Pure Oligopoly
The term ‘Oligopoly’ comes from the Greek words ‘oligos’ and ‘polis’ and it means
few sellers. There are few sellers in pure oligopoly and there is no product
differentiation. There is no precise limit on the number of sellers that an industry can
have to be characterized as oligopoly. The key issue is not the number of sellers but
the reaction of sellers to one another. No product differentiation. Demand is price
elastic.
E.g. Heavy Commercial Vehicle: TELCO and Ashok Layland

3. Pure Competition
Pure competition also known as perfect competition. It is characterized by the
existence of large number of sellers offering the same product. No product
differentiation is possible. Product price play important role in the industry. The
determination of product price is not within the control of single sellers, the higher
profit emerges due to better operation efficiency rather than strategic focus.
E.g. sugar, steel, tea, etc…..

4. Differentiated Oligopoly
A differentiated oligopoly exists where number of sellers in the industry is limited
but they offer product which can be differentiated from others. Such differentiation
is done on the basis of the product features, styling, quality, delivery, after-sales
service, price, etc…
E.g. passenger car industry is a kind of oligopoly in which number of competitors is
very limited and each competitor positions its cars on some unique selling
propositions through most of the cars falling in a price band have same functionality.
 5. Monopolistic Competition
Monopolistic competition is characterized by the existence of large number of
sellers in a product group with each seller differentiating its product on some basis
from that of others. It is a combination of both monopoly and pure competition.
It has element of monopoly because the product id differentiated in such a way that it
has very high customer loyalty and the company concerned can operate on the basis
of monopoly. It has the elements of pure competition as there are numerous sellers
which operate in the same product group. The basic focus for competing in this type
of industry is to put emphasis on product differentiation which ultimately determines
the profit performance of a company.
E.g. all consumers industries with branded products.

3. Industry Attractiveness
Industry attractiveness consists of factors prevailing in the industry concerned which
affect the profitability of an organization favorably or unfavorably. An industry is
considered attractive that offers scope for earning profit.
Industry attractiveness is determined by the following factors:
1. Nature Of Demand
2. Industry Potential
3. Profit Potential
4. Entry and Exit Barriers

1. Nature of Demand
The analysis of demand in terms of total market size in which the organization is
presently operating or plans to enter gives the scope of its present and future business.
If the industry demand is increasing because of certain factors like increase in
population, increase in income, change in taste, etc..., the industry becomes attractive
and vice versa. In demand analysis, pattern of demand is another important factor.
Demand may be affected by seasonal and cyclical factors.

2. Industry Potential
Industry potential deals with the scope of business that it offers at present and future.
This depends on the total industry sale potential. A high-volume industry has much
more potential than a low-volume industry. This is so because the high-volume
industry can accommodate large number of player and capturing a large market share
pushes the sale at high level.

3. Profit Potential
Profit potential is related to the existence of possibility of earning targeted volume of
profit. As profit volume is related with sales volume. Generally, knowledge-based
industry offer higher profitability. Similarly the industries where product
differentiation exists offer higher profitability as compared to commodity industry.

4. Entry and Exit Barriers

Every industry has some entry barriers to new entrants and exit barriers to the existing
players. There are number of entry barriers like economy of scale of operation,
investment requirement, degree of product differentiation, cost disadvantages,
government policy, etc…
 In the same way, there may be exit barriers also for the existing companies.
E.g. if company exists from industry, it has to pay some cost which will depend on the
desirability of putting the existing production facility to alternative uses.

4. Industry Performance
Industry performance is related to the current and future factors which determine the
performance of an industry vis-à-vis the other industry.
The performance of an industry is measured in the terms of the following factors:
1. Profitability
2. Operational Efficiency
3. Innovation
4. Technological Advancement

1. Profitability
Industry performance is generally measured in terms of profitability either related to
sales or investment. Through both these may move in the same direction in the
industry, these may give contrasting conclusions if two or more industries are
compared.
E.g. highly capital-intensive industry may show high profitability in relation to sales
as compare to low capital-intensive industry.

2. Operational Efficiency
Operational efficiency describes input-output relationship, i.e. what amount of output
is achieved by using a given amount of input. Operational efficiency depends on man-
machine ratio, manpower productivity, level of technology, infrastructure specific to
industry concerned, raw material quality and availability and so on.
E.g. operational efficiency in automated industry is higher as compared to semi-
automated industry.

3. Innovation
Innovation refers to any product or idea that is perceived by someone as new.
The idea may have a long history but it is an innovation to the person who sees it as
new. Take some time to spread in the social system. In some industry, the rate of
innovation is high as compare to other.
E.g. in IT industry, Mobile industry
Innovation may be in the form of new product features or through new market
channel, etc….

4. Technological Advancement
Technological Advancement is concerned with the rate of development of new
technologies and their adoption in creating products and services. High rate of TA –
entry barriers. Also create competitive advancement in form of cost and features.
E.g. introduction of four-stroke engine has advantage over two-stroke engine.

5. Industry Practices
Industry Practices refer to what a majority of industry players do with regard to
pricing, distribution, promotion and R&D. It depends upon nature of Industry.
To analyze a particular industry, following factors are study:
1. Pricing
2. Distribution
3. Promotion
4. Research and Development

1. Pricing
Practices for fixing price of product and various benefits offered. In some industry,
price discount is become regular feature.
E.g. some readymade cloth companies.
In some industry, it is given on special occasions.. Like, Diwali, Holi..etc…
E.g. in white goods i.e. TV, Refrigerator, Camera, etc…

2. Distribution
Specifies the channel of distribution of product to the customers.
Two ways:
– Direct Marketing
– Trough Intermediate channel Members
E.g. in Textile industry, Direct marketing – Raymond and in Car Industry - TATA,
Ford, Volkwagen…etc
For Durable good and FMCG goods, retailers and wholesaler used.

3. Promotion
It includes the various activities which a company undertakes to make its product
accessible and available to target customers.
Tools of Promotions: Advertisement, Personal Selling, Tread fairs, etc….
Normally, all companies follow the practice that follows by the Industry Leader.

4. Research and Development

It consists with activities through which either new product developed or an existing
product is improved. It also developed new technology in many industries.
R&D activity its expenditure differs from industry to industry and also it differs from
company to company.
E.G. High expenditure done by Pharma Industry on R&D.

II)Competition Analysis
Along with analyzing industry, competition analysis should be also be taken to
understand the exact nature of opportunity and threats that the particular industry
offers.
In analyzing competition, two types of analysis are required as following:
1. Forces Shaping competition
2. Competitor analysis

1. Forces Shaping Competition

Often competing organizations talk about the nature of competition in terms of their
existing competitors. However, it is rooted in its underlying economics, and
competitive forces exist that go well beyond the established players in a particular
industry. Customers, suppliers, potential entrants, and substitute product all are
competitors in the sense that they may be more or less prominent or active depending
on the nature of industry.
 Porter has identified five forces that shape competition in an industry which are as
following:
1. Threats of entry
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Substitute products
5. Rivalry among competitors

Force Shaping Competition

1. Threats of Entry
There are six sources of barriers to entry:
1. Economies of Scale: The economies of scale deter entry by forcing the aspirant either
to come on a large scale or to accept a cost disadvantage. Such economies of scale
may be in the area of production, research, marketing and distribution, financing and
other part of the business.

2. Product Differentiation: Brand identification creates a barrier by forcing entrants to

spend heavily to overcome customer loyalty. Advertising, customer service, being the
first in the industry and product differences are among the factors fostering brand
identification. Product differentiation may act as powerful barrier where brand loyalty
is quite high such as toilet soap, soft drinks, cosmetics and other personal products.

3. Capital Requirement: The need to invest large financial resources in order to

compete creates a barrier to entry, particularly if the capital requirement is high for
projects with long gestation period. Capital is required not only foe fixed assets but
also for customer credit, inventories and absorbing start-up losses.
4. Cost Disadvantages and Independent of size: The existing organizations may have
cost advantages not available to potential rivals, no matter what their size and
attainable economies of scale are. There advantages can stem from the effect of
learning curve, proprietary technology; access to the best raw material sources, assets
purchased at pre-inflation price, etc. the experience curve or learning curve work as a
powerful entry barrier. New competitors with no experience face higher costs than
established ones, particularly the producers with largest market share.

5. Access to Distribution channels: The new entrants may not have access to
distribution channels enjoyed by the established organizations. The new entrants may
enjoy all these only at higher costs. Therefore, they may not remain competitive. The
more limited the wholesale and retail channels are and more the existing competitors
have these tied up, tougher the entry into the industry will be. Sometimes, these
barriers are so high that a new entrant has to create its own distribution channels, as
has been done by Reliance Industries Limited.

6. Government Policy: It plays a major role as entry barrier. The government can limit
or even foreclose entry to industry with such control as licensing policy of the
government is to ban entry when it feels that there is balanced demand and supply of a
particular product. The Government can also play a major role by effecting barriers
through controls such as raw materials supply, price regulation, air and water
pollution standards and safety regulations.

Experience Curve as Entry Barrier

Boston Consulting Group has suggested the use of experience curve as entry barrier.
Learning curve and experience curve are different from each other in their scope.
Learning curve has a limited scope and refers to the efficiency achieved over a period
of time by workers through performing repetitive work. While experience curve is a
broader concept and encompasses many factors besides labor efficiency. The basic
theme of EC is that there are significant performance rewards over time as an
organization grown in size and experience. Total cost per unit declines with additional
production.
Cost per unit decline due to following factors:
1. Economies of scale of production
2. Labour efficiency
3. Improved process and methods
4. Product redesign
5. Product standardization
The company becomes entry barriers for new comers. It can also Important to become
a market leader. The company can also minimize the price of product to create
competitive advantage in the market. E.g. Bajaj Auto
 Experience Curve

Limitation of Experience Curve

1. Operational Efficiency: Experience curve cost is based on operational efficiency and

not on any strategic positioning. Operational efficiency can easily be emulated by a
new entrant through benchmarking and other tools. Therefore, the kind of operational
advantage enjoyed by early entrant does not remain advantageous.
2. Resistance to change: As an organization becomes older, there is tendency to
develop resistance and old practices are hard to change even if necessitated by
environmental changes.

3. New Technology and processes: The experience curve advantages can be nullify by
a new entrant through better technology and processes not available to old rival which
based its strategy on experience curve. Then, these new technology and processes
create a new experience curve.

4. Industry growth will hamper: There is one inherent disadvantage of basing strategy
on experience curve. If more than one strong company is building its strategy on
experience curve, the ultimate industry growth will hamper. Because each company
competes on the same basis, weaker ones will find it difficult to survive and leave the
 field. Therefore, market development activities are restricted and growth prospect is
hampered.

2. Bargaining Power of Buyers

Influence to shape the price, quality of product, service offered, etc…

If there is powerful buyer group, there will be buyers’ market and producers, profits
will suffer.
Buyers group is powerful in the following situations:
1. Buyer purchases in large volume.
2. Product is standard and undifferentiated.
3. If the product purchase by the buyers is the components of some other product or
significant part of its cost then they like to buy it at favorable price.
4. If buyers earn low profit – more price sensitive and vise-versa.
5. When industry’s product is unimportant to quality of buyers product – more price
sensitive.
6. Buyers pose a problem of backward integration.

3. Bargaining Power of Suppliers

Suppliers can create threats by rising price of goods and services.

Bargaining power of suppliers depends upon characteristics of the market.
A supplier group is powerful in following situations:
1. Few organizations and concentrated suppliers.
2. Unique or differentiated product of suppliers
3. Switching cost is high.
4. No substitute is available.
5. Poses threats of forward integration.
6. Industry is not important for the supplier group.

4. Substitute Products

The amount of competition in the industry also depends upon the substitutability of
product.
Substitute products that deserve the most attention strategically are as follows:
1. Price-performance tradeoff between industry’s product and substitute product.
2. If industry is earning high profit

5. Rivalry for Position

This includes the competition among different players of same industry.

Intense rivalry is related to a number of factors in the industry which are as follows:
1. Number of competitors and all try for same end result.
2. Often industry growth is slower as compared to the rate of growth in product supply
offered by numerous competitors.
3. Lack of differentiation and low switching cost.
4. Perishable good
5. When exit barrier is high.
6. Different competitors use different strategies.
 2. Competitor Analysis

In an industry, competitors are the companies that satisfy the same customer need.
In analyzing competitors, a company faces two types of issues:
1. Identification of Competitors
2. Competitors’ Approach

1. Identification of competitors
There may be several types of competitors on the industry structure:
1. Strong or Weak:
A Strong Competitor is one which holds substantial strategic advantages and
substantial market share in industry. For Eg; ITC in cigarette or Bajaj Auto in
scooter.
A Weak Competitor is one which does not have any specific strategic advantage and
act as a follower.

2. Close or Distant:
A Close Competitor is one which resembles with another company, for example;
Coca-Cola and Pepsi in soft drink. Most of the company focuses on close competitors.

A Distant Competitor is one which operates in the same industry group but
differentiates its product offerings, for example; Hindustan Motor in car industry.

3. Good or Bad:
A Good Competitor is one which adheres to industry norms and rules; it is not
involved in unreasonable price cutting or similar other tactics to gain market share.

A Bad Competitor is one which tries to buy market share rather than earn it; it takes
large risk by creating overcapacity to upset industry equilibrium. Such a competitor
may be called as aggressive one. It is not desirable to name companies in these two
categories because of ideological connotation but there are many such companies.

2. Competitors Approach
For analyzing competitors’ approach, Wall and Shin have identified the various
factors on the basis of which a competitor may be analyzed. These factors are as
following:
 Pricing
 Expansion plans
 Competitive plans
 Promotional strategy
 Cost data
 Sale statistics
 R&D
 Product style
 Mfg. processes
  Patents and infringements
 Financing and executive compensation

To analyze competitors in the industry concerned, strategists should search the answer
of the following questions:

 What are the strategic strengths and weaknesses of their competitors in the areas of
marketing, financing and managerial practices?
 What are the prices charged by the competitors and what prices does their
organization charge?
 What are the cost and other advantages / disadvantages of their competitors?
 What is the product positioning of competitors?
 What are the areas uncovered by the competitors?
 What is the competitors’ product performance?

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