Structural Analysis Within Industries

On the horns of dilemma
» Why does the performance of firms in the same industry differ ? » Why are some firms persistently more profitable ? » How does it relate to strategic posture of firms ? » How to select a competitive strategy ?

Dimensions
» » » » » » Specialization Brand Identification Pull v/s Push Channel Selection Quality Technological Leadership

Dimensions (continue…)
» » » » » » » Vertical Integration Cost Position Service Price Policy Leverage Relationship With Parent Company Relationship to Home and Host Government

Structural Analysis

Step : 1 Characterize all the strategies along various dimensions

Strategic Groups
» They exists due to various reasons like ... » Once formed, firms in the same group resembles to one another closely » MUST include firm’s relationship to its parent » CAUTION: what degree of strategic difference is important » All five forces wont have equal impact on different groups

Drawing Strategic Group Map
» » » » Identify two important competitive dimensions Plot the firms on the two-variable map Draw circles around the firms that are clustered together Indicate potential movement of firms with arrows

Possible Axes
High High

Market  penetration Brand image
Low Low

Specialty focus

Broad range

Low cost focus

Product line mix
Direct mail Retail stores Online

Distribution channels

High

Product  price
Low Broad Narrow

Strategic focus differentiation

Group A

Full Line

Full line, vertically integrated low manufacturing costs, low service, moderate quality Group C

Specialization

Moderate line, assembler medium price, very high customer service, low quality, low price Group B
Narrow line, assembler,high price, high tech, high quality

Narrow Line

Group D Narrow line, highly automated, low price, low service

High Vertical Integration

Assembler

Vertical Integration

Structural Analysis

Step : 2 Access the height and composition of mobility barriers protecting each group

Mobility Barriers
» Factors that deter the movement of firms from one strategic position to another
– e.g. scale economies, switching cost …

» » » »

Depends on strategic group that the entrant seeks to join Prevents quick imitation of successful strategy No exhaustive list of mobility barriers AGAIN Don’t forget the parent

Structural Analysis

Step : 3 Access the relative bargaining power of each strategic group

Bargaining Power
» Different degree of bargaining with Customers/ Suppliers prevails in different groups » Two sets of customers or suppliers
– Common Suppliers/ Customers – Group Specific Suppliers/ Customers

» The extent to which relative power can vary depends on the industry

Structural Analysis

Step : 4 Access the relative power of each strategic group vis-à-vis substitute products

Threat of Substitutes
» Groups may face differing levels of exposure to competition from substitutes
– e.g. Computer vendor selling computers for home users is less vulnerable from Computers produced for developers by some other vendor

Structural Analysis

Step : 5 Access the pattern of market interdependence among strategic groups

Rivalry Among Firms
» Forces of rivalry are not faced equally by all firms in the industry » Greater diversity implies
– Difficult to understand one another’s intentions and reactions – Increased likelihood of repeated outbreaks – Higher the force of rivalry

» Hence process of competitive rivalry is not symmetrical

Rivalry Among Firms
» Factors determining the pattern of rivalry:
– – – – Market Interdependence Product Differentiation Number of Strategic Groups and their relative sizes Strategic Distance among groups

» Strategic Distance refers to the degree to which strategies in groups diverge

Determinants of Firm’s Profitability
1. 2. 3. 4. 5. 6. 7. Mobility barriers protecting the strategic group Position of strategic group within industry Position of firm within strategic group Scale of strategic group Cost of Entry Time of Entry Firm’s Implementation Ability

Strategy Group & Cost Position
» Low cost position overall v/s that within the strategic group » Requires sacrifice in a other area of a strategy » Difference between cost in strategic group and those of low cost strategic group is crucial » Relative cost position among group is a key variable

Strategic Opportunities
1. 2. 3. 4. 5. Create a strategic group Shift to a more favorably situated strategic group Strengthen the structural position of the existing group Strengthen the firm’s position in the group Shift to a new group and strengthen that group’s structural position

“Strategy is a choice on how to compete”
- Michael Porter

Thank you …

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