Strategic Management

Lecture 2
What is influencing profitability in your
industry?
 Forces that shape competition
• Established rivals

• Savvy customers

• Powerful suppliers

• Aspiring entrants

• Substitute offerings
New Entrants (Entry Barriers)
• Supply-side economies of scale. (e.g. Intel, Grammenphone)
• Demand-side benefits of scale. (e.g. Singer>Minister)
• Customer switching costs. (e.g. Microsoft >MacOs, SAP’s ERP> Oracle)
• Capital requirements. (Air carrier paradox)
• Incumbency advantages independent of size (Daily shopping> Meena)
• Unequal access to distribution channels (e.g. Spicejet, Regent Air)
• Restrictive government policy. (Licensing requirement vs Subsidies)
Expected Retaliation
• Incumbents have previously responded vigorously to new entrants.

• Incumbents possess substantial resources to fight back

• Incumbents seem likely to cut prices because they are committed to

retaining market share at all costs

• Industry growth is slow so newcomers can gain volume only by taking

it from incumbents.
The power of suppliers
Supplier is powerful When:
• It is more concentrated than the industry it sells to. (Microsoft)
• The supplier group does not depend heavily on the industry for its
revenues. (Freelancing, Elevator companies)
• Industry participants face switching costs in changing suppliers. (Pran)
• Suppliers offer products that are already differentiated. (Radiant)
• There is no substitute for what the supplier group provides. (Pilots)
• The supplier group can credibly threaten to integrate forward into the
industry. (Alibaba, Luxottica acquiring Rayban, Oakley and Sunglass Hut)
How to tackle?
 The power of buyers
Electronics product over Utility service provider

• There are few buyers, or each one purchases in volumes that are large relative to
the size of a single vendor. (industrial Customers)

• The industry’s products are standardized or undifferentiated.(Midrange Mobile)

• Buyers face few switching costs in changing vendors. (Low cost restaurants)

• Buyers can integrate backward and produce the industry’s product. (Swapno)
How to tackle?
• Differentiate the product or create new ways to satisfy need
• Choose easy to serve customers
• Offer Only Desired Benefits
• Forward Integration
The threat of substitutes
YouTube over Netflix, Skype over ISD

• Substitute product is cheaper than industry product

• Consumer switching costs are low
• Substitute product quality is equal or superior to industry product
quality
• Substitute performance is equal or superior to industry
product performance
How to tackle?
• Focusing on the price/quality/Performance?
• Creating Brand Image and Loyalty
• Awareness about usage of the product (Apple Cider Vinegar)
• Customer Relations
• Skip

The better the relative value of the substitute, the tighter is the lid on
an industry’s profit potential.
Rivalry among existing competitors
Rivalry can be positive sum, or actually increase the average profitability
of an industry, when each competitor aims to serve the needs of
different customer segments, with different mixes of price, products,
services, features, or brand identities.

Such competition can not only support higher average profitability but
also expand the industry, as the needs of more customer groups are
better met.
Factors, Not Forces
• Industry growth rate (Personal Computer’s profitability woe)
• Technology and innovation (Software and internet technology are
not masters)
• Government (Patent policy vs Unions policy)
• Complementary products and services
Industry Analysis
• Define the relevant industry:
• Identify the participants and segment them into groups, if
appropriate:
• Assess the underlying drivers of each competitive force to determine
which forces are strong and which are weak and why.
• Determine overall industry structure, and test the analysis for
consistency:
• Analyze recent and likely future changes in each force, both positive
and negative.
• Identify aspects of industry structure that might be influenced by
competitors, by new entrants, or by your company.