CORPORATE STRATEGY

SLIDE SET 3

2022-2023
Industry Analysis: the Fundamentals

OUTLINE

• Introduction / Objectives
• From environmental analysis to industry analysis
• Analyzing industry attractiveness
• Applying industry analysis to forecast industry profitability
• Using industry analysis to develop strategy
• Defining industries: Where to draw the boundaries
• Identifying Key Success Factors
INTRODUCTION / OBJECTIVES

The Objectives of Industry Analysis

• To understand how industry structure drives competition,

which determines the level of industry profitability.

• To assess industry attractiveness

• To use evidence on changes in industry structure to

forecast future profitability

• To formulate strategies to change industry structure to

improve industry profitability

• To identify Key Success Factors

 FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

At the Core of the Macro Environment

is the Industry Environment
The national/ The natural
international environment
economy
THE INDUSTRY
ENVIRONMENT
Demographic
Technology • Suppliers structure
• Competitors
• Customers
Government
Social
Socialstructure
structure
& Politics

The Macro Environment impacts the firm through its effect

on the Industry Environment

Copyright (© 2019 John Wiley & Sons, Inc.

ANALYZING INDUSTRY ATTRACTIVENESS

Profitability of Selected US Industries (median ROCE)

HIGH PROFITABILITY % LOW PROFITABILITY %
Tobacco 59.9 Food and Drug Stores 10.2
Computer Software 29.8 Utilities: Gas and Electric 9.6
Household, Personal Care 25.2 Telecom Services 9.5
Semiconductors 22.5 Agricultural Processing 9.5

Pharmaceuticals 21.3 Petroleum 9.2

Entertainment 20.7 Insurance 9.1

Aerospace, Defense 19.9 Food Retailing 9.1

Beverages 19.2 Trucking 9.1

Chemicals, Specialty 18.2 Hotels, Casinos 9.0

Food Processing 18.0 Motor Vehicle Parts 9.0

Medical Products 17.5 Electrical Power 6.0

Engineering/Construction 16.8 Motor Vehicles 5.7
Restaurants/Catering 16.6 Airlines 5.1

Copyright (© 2019 John Wiley & Sons, Inc.

 ANALYZING INDUSTRY ATTRACTIVENESS

The Determinants of Industry Profitability

3 key influences:

1. The value of the product to customers

2. The intensity of competition

3. Relative bargaining power at different

stages of the value chain

Copyright (© 2019 John Wiley & Sons, Inc.

ANALYZING INDUSTRY ATTRACTIVENESS

The Determinants of Industry Structure

Typical Barriers to Entry
• Economies of size - The need for a large volume of production and sales to
reach the cost level per unit of production for profitability is a barrier to
entry.
• Capital intensive - A large capital investment per unit of output in facilities
tends to limit industry entry.
• Intellectual property - Patents and other types of proprietary intellectual
property are very effective in limiting industry entry.
• High switching costs - The tendency for buyers of an industry’s products to
be reticent about switching to a new supplier tends to limit entry.
• Established brand identity - Industries dominated by branded products are
difficult to enter due to the large amount of time and money required to
create a competing branded product.
• Permitting requirements - Industries where permitting and licenses are
required to establish production tend to have limited entry.
• Government standards - Industries where rigid industry standards exist tend
to have limited entry.
ANALYZING INDUSTRY ATTRACTIVENESS

The Determinants of Industry Structure

Typical Barriers to Exit
• Investment in specialist equipment - Investments in specialized
equipment that cannot readily be used in other industries tends
to be an impediment to leaving the industry.
• Specialized skills - Highly specialized skills by industry
participants that cannot be utilized in other industries tend to
be an impediment to leaving the industry.
• High fixed costs - High levels of dedicated fixed costs tend to be
an impediment to leaving an industry
 ANALYZING INDUSTRY ATTRACTIVENESS

The Spectrum of Industry Structures

Perfect
Competition Oligopoly Duopoly Monopoly

Concentration Many firms A few firms Two firms One firm

Entry and Exit No barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Information Perfect
availability Imperfect availability of information
Information

© 2019 Robert M. Grant www.contemporarystrategyanalysis.com

 ANALYZING INDUSTRY ATTRACTIVENESS

Porter’s Five Forces of Competition

Framework
SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS new entrants substitutes
Rivalry among
existing firms

Bargaining power of buyers

BUYERS

Copyright (© 2019 John Wiley & Sons, Inc.

 ANALYZING INDUSTRY ATTRACTIVENESS

The Structural Determinants of Competition

SUPPLIER POWER
• Buyers’ price sensitivity
• Relative bargaining
power

THREAT OF ENTRY SUBSTITUTE

INDUSTRY RIVALRY
• Capital requirements COMPETITION
• Economies of scale • Concentration
• Diversity of • Buyers’ propensity
• Absolute cost advantage
competitors to substitute
• Product differentiation
• Product differentiation • Relative prices &
• Access to distribution
channels • Excess capacity and performance of
exit barriers substitutes
• Legal/ regulatory barriers
• Cost conditions
• Retaliation

BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
Copyright (© 2019 John Wiley & Sons, Inc.
 ANALYZING INDUSTRY ATTRACTIVENESS

Threat of Substitutes

Extent of competitive pressure from producers

of substitutes depends upon:

• Buyers’ propensity to substitute

• The price-performance characteristics of

substitutes.

Copyright (© 2019 John Wiley & Sons, Inc.

 ANALYZING INDUSTRY ATTRACTIVENESS

Threat of New Entry

Entrants’ threat to industry profitability depends
upon the height of barriers to entry.
The principal sources of barriers to entry are:
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation

Copyright (© 2019 John Wiley & Sons, Inc.

ANALYZING INDUSTRY ATTRACTIVENESS

Bargaining Power of Buyers

The extent to which buyers are able to depress
profitability in an industry depends upon:

Buyer’s price sensitivity Relative bargaining power

• Importance of item in • Size and concentration of

relation buyers relative to sellers.
to buyers’ total costs.
• Buyer’s information .
• Differentiation of the
purchased item • Ability to backward integrate.
• Intensity of competition
among buyers
• Whether item is critical to the
quality of buyers’ own output NOTE: analysis of supplier
power is symmetric
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS

Rivalry Between Established Competitors

The extent to which industry profitability is depressed
by aggressive price competition depends upon:
▪ Concentration (number and size distribution of firms)
▪ Diversity of competitors (differences in goals, costs
strategies, etc.)
▪ Product differentiation
▪ Excess capacity and exit barriers
▪ Cost conditions
» Ratio of fixed to variable costs
» Extent of scale economies

Copyright (© 2019 John Wiley & Sons, Inc.

APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY

Applying Five-Forces Analysis to Forecast

Industry Profitability
• Perform a Five Forces Analysis to understand why the
industry’s current level of profitability is what it is

• Identify the changes in industry structure that are likely

to occur over the next few years. E.g.
– Is new entry likely?
– Will concentration increase as a result of mergers
and acquisitions?
– Will additions to industry capacity outpace the
growth in demand?
– Will innovation create new substitutes?

• Use the Five Forces Framework to predict the impact of

these structural changes on competition and
profitability
Copyright (© 2019 John Wiley & Sons, Inc.
USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY

Using Industry Analysis to Develop Strategy

Strategies to Improve Industry Profitability

• Which of the structural variables that are depressing
profitability can we change by individual or collective
strategies?

Strategic Positioning
• Once we know which structural features of the industry
support profitability and which depress profitability, we
can choose a favorable positioning within the industry.

Copyright (© 2019 John Wiley & Sons, Inc.

 DEFINING INDUSTRIES

Drawing Industry Boundaries

▪ What industry is Ferrari in?
– The Motor Vehicle industry (SIC 371)
– The Automobile industry (SIC 3712)
– The sports car industry
– Is its industry global, regional (Europe) or national (Italy)?

▪ Key criterion: SUBSTITUTABILITY

– On the demand side : are buyers willing to substitute between
types of cars and across countries
– On the supply side : are manufacturers able to switch production
between types of cars and across countries

We may need to draw industry boundaries differently for

different types of decision

Copyright (© 2019 John Wiley & Sons, Inc.

 IDENTIFYING KEY SUCCESS FACTORS

Identifying Key Success Factors

Pre-requisites for success

What do How does the firm

customers want? survive competition

Analysis of competition
Analysis of demand
• What drives competition?
• Who are our •• What
What are
drives
the competition?
main
customers? • What are the
dimensions of main
competition?
dimensions of competition?
• What do they want? •How
• Howintense
intenseisiscompetition?
competition?
• Howcan
•How canweweobtain
obtainaasuperior
superior competitive
competitive position? position?

KEY SUCCESS FACTORS

Copyright (© 2019 John Wiley & Sons, Inc.
 IDENTIFYING KEY SUCCESS FACTORS

KSFs in Steel, Fashion Clothing, and Supermarkets

WHAT DO CUSTOMERS WANT?
Steel • Low price
• Product consistency
• Reliability of supply
• Specific technical
specifications for special
steels
Fashion • Demand segmented by
clothing garment type, style, quality,
color
• Price premium for brand,
style, exclusivity, and quality • Differentiation can yield
• Mass market highly price
sensitive
Super- • Low prices
markets • Convenient location
• Wide product range adapted
to local tastes
• Fresh produce, good service,
pleasant ambience, easy
parking
HOW FIRMS SURVIVE KEY SUCCESS FACTORS
COMPETITION?
• Strong price competition • Cost efficiency requires either
and cyclical demand require large plants in low-cost locations,
low costs and financial or hi-tech, flexible, mini-mills
strength close to customers
• Quality and service differentiation
• Intensely competitive due to • Combining differentiation with
low entry barriers, low seller low-costs
concentration, and strong • Key differentiation variables:
retail buying power design, speedy to fashion trends,
brand reputation, quality
substantial price premium, • Cost efficiency requires low labor
but imitation rapid costs
• Markets localized • Low-costs require operational
• Intensity of price efficiency, efficient supply chain,
competition depends on buying power, low wage costs.
number and proximity of • Differentiation requires wide
competitors product range (hence, large
• Bargaining power essential stores), convenient location, easy
to low input costs parking

Copyright (© 2019 John Wiley & Sons, Inc.

 IDENTIFYING KEY SUCCESS FACTORS

Identifying KSFs Through Modeling

Profitability: The Airline Industry
Profitability = Yield x Load factor - Unit Cost
Income = Revenue
x RPMs - Expenses
ASMs RPMs ASMs

• Strength of competition on • Price competitiveness. • Wage rates.

routes. • Efficiency of route • Fuel efficiency of
• Responsiveness to changing planning. planes.
market conditions • Flexibility and • Employee
responsiveness. productivity.
• % business travelers.
• Customer loyalty. • Load factors.
• Achieving differentiation
• Meeting customer • Administrative
advantage
requirements. overhead.

NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles

Copyright (© 2019 John Wiley & Sons, Inc.

 IDENTIFYING KEY SUCCESS FACTORS

Identifying KSFs by Analyzing

Profit Drivers: Retailing
Sales mix of products

Avoiding markdowns through

Return on Sales tight inventory control

Max. buying power to minimize

cost of goods purchased
ROCE
Max. sales/sq. foot through:
*location *product mix
*customer service *quality control

Sales/Capital Max. inventory turnover through

Employed electronic data interchange, close
vendor relationships, fast delivery

Minimize capital deployment

through outsourcing & leasing
© 2019 Robert M. Grant
www.contemporarystrategyanalysis.com
INDUSTRY ANALYSIS: THE FUNDAMENTALS

Summary
From Environmental Analysis to Industry Analysis:
• The industry is the core of a firm’s external environment. Political, economic,
social, and technological forces impact the firm through its industry :

Forecasting Industry Profitability

• Past profitability a poor indicator of future profitability.
• If we can forecast changes in industry structure we can predict likely impact
on competition and profitability.

Strategies to Improve Industry Profitability

• Influencing industry structure by individual or collective strategies
• Positioning the firm to shelter from the forces of competition

Defining Industry Boundaries

• Key criterion: substitution
• Industry definition depends upon the strategic issues being considered

Key Success Factors

• Gateway to the analysis of competitive advantage

Copyright (© 2019 John Wiley & Sons, Inc.