Strategic Management

Industry and Sector

Analysis
Porter’s 5 Forces Model

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Porter’s 5 Forces Model
Was originally developed as a way of
assessing the attractiveness (profit potential)
of different industries
Porter’s initial message is that where
these 5 forces are high, then industries
are not attractive to compete in.

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 Threat of entry
 Barriers to entry are factors that need to be overcome by
new entrants if they are to compete successfully
 New entrants to an industry bring new capacity and a desire
to gain market share that puts pressure on prices, costs and
the rate of investment necessary to compete
 Scale and experience – “economies of scale” – Once
incumbents have reached large-scale production, it will be
very expensive for new entrants to match them → high
investment are required → production of automobiles or the
advertising of fast-moving consumer goods
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 Experience curve effects – give incumbents a cost
advantage as they have learnt how to do things more
efficiently
 Access to supply or distribution channels – direct
ownership (vertical integration) or supplier loyalty;
Salvation – e-commerce → bypassing retail distributors
and selling directly to consumers. (e.g. Dell Computers
and Amazon)
 Expected retaliation – believing the power of retaliation
of the existing company or meaning that entry would be
too costly 5
Threat of entry

 Legislation or government action –

patent protection, regulation of markets,
direct government action

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 Threat of entry
 Incumbency advantages – cost or quality advantages
not available to entrants → access to proprietary
technology, raw material sources and geographical
locations or an established brand identity
 For ex: Patents in medical instruments industry or
brand loyalty of Coca-Cola or Pepsi
 Differentiation reduces the threat of entry as it
increases customer loyalty
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 Threat of Substitutes
 Substitutes are products or services that offer similar
benefit to an industry’s products or services, but by a
different process. For ex: aluminium vs. steel in automobiles;
trains vs. cars; tablets vs. laptops; charities vs. public
services
 Substitutes can reduce demand for a particular ‘class’ of
products as customers switch to the alternatives
 Risk of substitution puts cap on the prices → train
company cannot offer prices similar to or more than the flight
prices
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 Threat of Substitutes
 The price / performance ratio – the product is expensive
but it offers performance advantages;
 For ex: aluminium is more expensive than steel but
its lighter and more resistant to corrosion
 Extra-industry effects – Substitutes come from
outside the incumbents’ industry
 The value of the substitution concept is to force
managers to look outside their own industry

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The power of buyers
 Buyers are the organization’s immediate
customer, not necessarily the ultimate
customers
 Powerful buyers can capture more value by forcing
down prices, demanding better quality or more
service and generally playing industry participants
off against one another
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 The power of buyers
 The bargaining power of buyers is high if:
1. There are few buyers in the market
2. Low switching costs
3. Buyer competition threat – buyer has some facilities to
supply itself → backward vertical integration (ex. Window
producer (buyer) start producing the glass)
4. Low buyer profits and impact on quality - buyer group is
unprofitable and pressured to reduce purchasing costs; the
quality of the buyer’s product or services is little affected by
the purchased product.
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 The power of Suppliers
 Supplier are those who supply the organization with
what it needs to produce the product or service, and
include labor and finance
 Powerful suppliers capture more of the value for
themselves by charging higher prices, limitating
quality or services, or shifting costs to industry
participants
 Microsoft in the PC industry
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 The power of buyers
 The bargaining power of suppliers is high if:
1. Concentrated suppliers – where just a few producers
dominate supply, suppliers have more power over
buyers (ex. Iron ore producers, Microsoft in the PC
industry)
2. High switching cost – when it is expensive or
disruptive to move from one supplier to another (ex:
Microsoft is powerful as it is very expensive for
companies to move to another operating system)
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 The power of buyers
3. Supplier competition threat – suppliers cut out buyers
who are acting as intermediaries (forward vertical
integration) – For example: Airline Companies negotiate
tough or even stop cooperating with the travel agencies as
online booking getting more popular
4. Differentiated products. When the products or services
are highly differentiated, suppliers will be more powerful.
For ex: P&G with Gillette vs. Walmart or Pilots’ Union in
the airline industry
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Competitive Rivalry
Competitive rivals are organizations aiming at the same
customer groups and with similar products and services (i.e.
not substitutes).
The more competitive rivalry there is, the worse it is for
incumbents
For ex: In the European airline industry, Air France and British
Airways are rivals; high-speed trains are a ‘substitute’.
Five factors tend to define the extent of rivalry in an industry
or market:

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Competitive Rivalry
Competitor concentration and balance – numerous and equal
powerful competitors → competitors attempt to gain dominance over
others, through aggressive price cuts. Less rivalrous industries tend to
have one or two dominant organizations, with the smaller players
reluctant to challenge the larger ones directly
Industry growth rate - In situations of strong growth, an
organization can grow with the market, but in situations of low growth
or decline, any growth is likely to be at the expense of a rival. Low-
growth markets are therefore often associate with price competition
and low profitability
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Competitive Rivalry
High fixed costs – companies require high investments in capital
equipment or initial research, tend to be highly rivalrous. Companies
will seek to spread their costs (i.e. reduce unit costs) by increasing
their volumes → cutting prices, prompting competitors to do the same
→ trigger price wars in which everyone in the industry suffers
High exit barriers - The existence of high barriers to exit (closure or
disinvestment) tends to increase rivalry, especially in declining
industries. Excess capacity persists (high redundancy cost, high
investments, etc.) and consequently incumbents fight to maintain
market share
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Competitive Rivalry
Low differentiation – In a commodity market, where
products or services are poorly differentiated, rivalry is
increased because there is little to stop customers
switching between competitors and the only way to
compete is on price. For ex: Petrol

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Implications of the Competitive Five Forces
The aim of the five force analysis is thus an assessment of the

attractiveness of the industry and any possibilities to manage

strategies in relation to the forces to promote long-term survival and
competitive advantage
Which industries to enter (or leave)? → industries are attractive

when the forces are weak.

But just one significantly adverse force can be enough to

undermine the attractiveness of the industry as a whole. For ex:

powerful buyers can extract all the potential profits of an attractive
industry structure by forcing down prices 19
Implications of the Competitive Five Forces
 How can the five forces be managed? → identifying strategic

positions where the organization best can defend itself against

strong competitive forces, can exploit weak ones or can influence
the.
 For ex: An organization can raise the entry barriers by increasing

advertising spending to improve customer loyalty; Managers can

buy up competitors to reduce rivalry and to increase power over
suppliers or buyers; Differentiating the products or services for the
specific customer group, thus increasing their loyalty and switching
costs if buyers are strong
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Implications of the Competitive Five Forces
How are competitors affected differently? → Not all

competitors will be affected equally by changes in

industry structure, deliberate or spontaneous.
For ex: Increased R&D or advertisement spending can

increase the entry barriers, thus squeeze out smaller

players; Growing buyer power is likely to hurt small
competitors most

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Implication of the model

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Busted banking barriers? Page 67
Evaluate the strengths of the banking industry’s

entry barriers according to Porter’s criteria.

How would you evaluate the ethical behavior of

banks trying to keep competition out?

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Steps in an industry analysis. Page 75

Help Emily and go through each step above. Answer

the questions and make a complete analysis. What

is your assessment of the industry?
Based on your analysis: How should Emily handle

the different forces? What strategic options should

she consider?

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 Complementors and network effects
An organization is your complementor if it enhances your

business attractiveness to customers or suppliers (e.g.

sausage and mustard)
On the demand side, customers value a product or service

more when they also have the other organization’s product

there
For ex: App providers are the complementors of Apple,

Samsung, Xiaomi, etc. because consumer value the gadgets

with more apps
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 Complementors and network effects
On the supply side another organization is a

complementor with respect to suppliers if it is more

attractive for a supplier to deliver when it also supplies
the other organization. For ex: competing airline
companies can be complementors to each other as
Boeing or Airbus prefers to invest in particular
improvements for two customers rather than one

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 Complementors and network effects
Porter’s Five Forces – rivals battle against each other

Complementors may cooperate to increase the total

value available (close to Game Theory concept)

Value net: a map of organizations in a business

environment demonstrating opportunities for value-

creating cooperation as well as competition

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 Complementors and network effects
There are network effects in an industry when one

customer of a product or service has a positive effect on

the value of that product for other customers → the more
customers that use the product, the better for everyone in the
network
For ex: the value of the online auction site eBay increases for a

customer as the network of other sellers and buyers grows on

the site → The more goods that are offered on the site, the
better for customers → makes eBay’s site and services more
attractive to users
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 Complementors and network effects
Network effects cause:

Increase in entry barriers

Low intensity of rivalry

Power over buyers

As a result entrants and rivals can’t compete with other

companies’ larger networks and buyers become locked into
them.

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Complementors and network effects
In some industries complementors and network effects

work in tandem. For example:

App providers are complementors of Apple →

customers more attracted to iPhone or iPad that has

more apps
The more consumers are attracted the network of

users grow

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 Complementors and network effects
Strategic lock-in is where users become dependent on a

supplier and are unable to use another supplier without

substantial switching costs
With customers securely locked in, it becomes possible to keep

prices well above costs → particularly valuable to differentiators

For example, customers that bought music on Apple’s iTunes

store could earlier only play it on Apple’s own iPod players. To

switch to a Sony player would mean losing access to all the
iTunes music previously purchased.
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Facebook’s network fears. Page 72
Why are network effects important for Facebook?

Would you switch to another social network if it had

better features even if it was considerably smaller?
What other social media networks and apps do you

use that you think could beat Facebook? Why?

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Industry types
Monopoly industries - is formally an industry with just one firm

with a unique product or service and therefore no competitive

rivalry → potentially very great power over buyers and suppliers
For ex: Google’s 65 per cent share of the American search

market gives it price-setting power in the internet advertising

market.
‘Network Effects’ where a product is more valuable because of

the number of other people using it (Facebook or Microsoft

Office) also make industry monopolistic
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Industry types
Oligopoly industries - just a few often large firms dominate

an industry, with the potential for limited rivalry and threat of

entrants and great power over buyers and suppliers
The actions of any one firm are likely highly influential on the

others
For ex: Iron Ore corporations such as Vale, Rio Tinto and

BHP Billiton. Boeing and Airbus the rivalry of which is called

duopoly.

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Industry types
In theory, oligopoly can be highly profitable, but much

depends on the extent of but depends on rivalrous behavior,

threat of entries and substitutes and the growth of final
demand in key markets
Oligopolistic firms have a strong interest in minimizing rivalry

between each other so as to maintain a common front against

buyers and suppliers → tacit collusion → companies
cooperate to reduce competition without any formal
agreement → can be illegal under certain circumstances
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 Industry types
Perfectly competitive industries - exists where barriers to entry are low,

there are countless equal rivals each with close to identical products or
services, and information about prices, products and competitors is
perfectly available
Competition focuses heavily on price → products are so similar, and

competitors typically cannot fund major innovations or marketing initiatives

to make them dissimilar
Firms are unable to earn more profit than the bare minimum required to

survive.
For ex: Agriculture products (potatoes, onions, apples, etc.) or street food

vendors in major cities

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Industry types
Markets are more commonly slightly imperfect so that

products can be differentiated to a certain degree and

with information not completely available for everyone.
Economists name these markets ‘monopolistic

competition’ as firms can still create a position or niche

for which they have some monopoly power over pricing
For ex: restaurants, pubs, hairdressers, shoe repairs,

but also the shampoo, cereal and toothpaste markets

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Industry types
Hypercompetitive industries - the frequency, boldness

and aggression of competitor interactions accelerate to

create a condition of constant disequilibrium and change
Rivals tend to invest heavily in destabilizing innovation,

expensive marketing initiatives and aggressive price

cuts, with negative impacts on profits
Hypercompetition often breaks out in otherwise

oligopolistic industries.
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Consolidation across the UK charity and
public sectors. Page 78
How would you describe the current charity industry

structure? How could it change if consolidation

increases and what would be the benefits and
disadvantages?
Which of Porter’s five forces are creating problems

for the UK’s charity sector?

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Product Life Cycle
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position
Hybrid engine vehicles Laptop computers

Boeing 787 Xbox One

DVDs
3D printers

Life Cycle Curve

Electric
vehicles
Apple Video
SmartWatch 3-D game physical
players rentals
Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting critical Standardization Little product
and development Product and Fewer rapid differentiation
critical process reliability product changes, Cost
Frequent product Competitive more minor minimization
and process changes
Strategy/Issues

product Overcapacity in
OMStrategy/Issues

design changes improvements and Optimum capacity the industry

Short production options Increasing stability Prune line to
runs Increase capacity of process eliminate items
High production Shift toward not returning
costs product focus good margin
Limited models Enhance Reduce
Long production capacity
Attention to quality distribution runs
OM

Product
improvement and
cost cutting
 The industry life cycle

 Industries can rapidly ‘de-mature’ via radical

innovation (for ex: cell phone or soft drink industry)

 ‘Maturity Mindset’ – can leave managers

complacent and slow to respond to new competition

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Competitive cycles

 Competition cycles – the sequence of move and

counter-moves (for ex: price cuts and imitated
innovations)
 Hypercompetitive industries – where these
interactions become very intense and fast that
industry structures are constantly undermined

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Competitive cycles

 The cycle of competition concept underlines the

fact that industry structures are not ‘natural’ but
are often created and reshaped by the deliberate
strategies of competitors

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Competitive cycles
1. New entrant attacking an incumbent’s established
market → ‘soft’ (unprotected) segment of the
market
2. No response from incumbent – new entrant
widens its attack to adjacent segment → risk
of increased industry rivalry and rapidly falling
industry profits
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3. Incumbent finally responses – increasing entry
barriers → reinforcing customer loyalty via
differentiation or advertisement
4. New entrant counters with price war
5. Finally, incumbent attacks the new entrant’s home
market hoping to persuade the new entrant to
back off → rivalry increases in that home
market
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Strategic groups

 Are organizations within an industry or sector

with similar strategic characteristics, following
similar strategies or competing on similar bases
 Grocery retailing industry, supermarkets,
convenience stores and corner shops each form
different strategic group

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Strategic groups

 Strategic group can be mapped onto 2 dimensional

charts – product range (diversity) and marketing
spend
 Identifying of top and low performers are also used
for mapping strategic groups

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Strategic groups
 Top performers → narrow product range vs. huge
marketing spend
 Low performers → wide product range vs.
restrained marketing spend
 A potential recommendation for the less profitable
firms would be to cut back their product range and
boost their marketing.
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Strategic groups
This strategic group concept is useful in at least three
ways:
• Understanding competition - Managers can focus on their
direct competitors within their particular strategic group,
rather than the whole industry as rivalry often is strongest
between these.
• They can also establish the dimensions that distinguish
them most from other groups → there may be profitability
differences between different strategic groups
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Strategic groups
• Analysis of strategic opportunities - Strategic group maps can
identify the most attractive ‘strategic spaces’ within an industry.
• Some spaces on the map may be ‘white spaces’, relatively under-
occupied → In the Indian pharmaceutical industry, the white space
is high R&D investment combined with focus on domestic markets.
Such white spaces might be unexploited opportunities.
• ‘Black holes’, is the concept which is impossible to exploit and
likely to damage any entrant. Therefore need to be tested carefully
• A strategic group map is only the first stage of the analysis.

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Strategic groups
• Analysis of mobility barriers - moving across the
strategic group map to take advantage of
opportunities often require difficult decisions and rare
resources
• ‘Mobility barriers’ are the obstacles to movement
from one strategic group to another → are the
equivalent to barriers to entry in five forces analysis,
but between different strategic groups within the same
industry 58
Strategic groups
Movement of Exploiter from group in Indian

pharmaceuticals to the Emergent global group demand

very substantial financial investment and strong
managerial skills
Main idea: It is good to be in a successful strategic

group protected by strong mobility barriers, to impede

imitation
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Market Segments
 Is a group of customers who have similar needs that
are different from customer needs in other parts of the
market
 Where these customer groups are relatively small, such
market segments are often called ‘niches’

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 Market Segments
• Variation in customer needs - Focusing on customer
needs that are highly distinctive from those typical in the
market is one means of building a long-term segment
strategy
• In industrial markets, segmentation is often thought of in
terms of industrial classification of buyers: steel
producers might segment by automobile industry,
packaging industry and construction industry
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Market Segments
• Segmentation by buyer behavior or purchase value:
direct buying vs. those users who buy through third
parties such as contractors high-value bulk purchasers
vs. frequent low value purchasers
• Main idea: Being able to serve a highly distinctive
segment that other organizations find difficult to serve is
often the basis for a secure long-term strategy

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 Market Segments
• Specialization – This sometimes called a ‘niche strategy’.
Organizations that have built up most experience in servicing
a particular market segment should not only have lower costs
in so doing, but also should have built relationships which
may be difficult for others to break down – Relative Market
Share
• Specialized producers may find it very difficult to compete on
a broader basis as customers value different things in
different segments
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Market Segments
For example, 1) A small local brewery competing against the
big brands on the basis of its ability to satisfy distinctive local
tastes is unlikely to find it easy to serve other segments where
tastes are different, scale requirements are larger and
distribution channels are more complex.
2) Small cloth producer which functions in the relatively poor
part of the country (or city) and competes against the famous
brands on the basis of its low prices supported and
confined to that market segment where the low price is
valued 64
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Identifying the strategic customer
 Strategic customer – is the person(s) at whom the
strategy is primarily addressed because they have the
most influence over which goods or services are
produced
 Or: All the customer influence demand, but one them
will be more influential than others
 The desires of the strategic customer usually provide
the starting point of the strategy
 Requirements of the strategic customer are paramount
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Critical Success Factors
• A strategy canvas compares competitors according to
their performance on key success factors in order to
establish the extent of differentiation. Figure 3.8 shows
a strategy canvas for three electrical components
companies.
• CSF are those factors that either are particularly valued
by customers (i.e. strategic customers) or provide a
significant advantage in terms of cost
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Critical Success Factors
Figure 3.8 identifies five established critical success

factors in this electrical components market (cost, after-

sales service, delivery reliability, technical quality, testing
facilities, and design advisory)

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Critical Success Factors
Value curves are a graphic depiction of how customers

perceive competitors’ relative performance across the critical

success factors.
In Figure 3.8 companies A and B perform well on cost,

service, reliability and quality, but less well on testing; Do not

offer any design advice; They are poorly differentiated which
decrease their profit margins. But company C, has a
radically different value curve, characteristic of a ‘value
innovator’.
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Critical Success Factors

Value innovation – is the creation of new market

space by excelling on established critical success

factors on which competitors are performing badly
and/or by creating new critical success factors
representing previously unrecognized customer wants.

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Critical Success Factors
Company C is value innovator:

Excels on the established customer need of offering

testing facilities for customers’ products

Offers a new and valued design service advising

customers on how to integrate their components in

order for them to create better products

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 Critical Success Factors
Blue Oceans are new market spaces where competition is

minimized.
‘Red Oceans’, are where industries are already well defined,

and rivalry is intense.

 Blue Oceans evoke wide empty seas

 Red Oceans are associated with bloody competition and ‘red ink’,

in other words financial losses.

 Blue Ocean concept is useful for identifying potential spaces in

the environment with little competition. These Blue Oceans are

strategic gaps in the marketplace 73
 Critical Success Factors
Two critical principles of Blue Ocean thinking in company

C: focus and divergence

Company C focuses its efforts on testing and design

services since its competitors are already high

performers in other fields
Company C has created a substantial strategic gap, or

Blue Ocean, in the areas of testing and design services

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 Critical Success Factors
Beating Companies A and B in the areas where they are

performing well will require high investment and will be less

advantageous as the customers are already satisfied there →
will increase rivalry → Red Ocean strategy
Its better to concentrate on where a large gap can be created

between competitors
Company C faces little competition for those customers who

really value testing and design services and consequently

ready to pay good prices
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 Customer viewpoint and clarity about strengths may
not be easy to achieve because:
 Sense Making – Managers are not always able to make
sense → lack of capability to draw useful conclusions
while having vast amounts of raw data about customers
 Distance from the ultimate customer – component
and raw material suppliers can be distanced from the
final users by several intermediaries; Value means to
the final customer is not understood.
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 Customer viewpoint and clarity about strengths may
not be easy to achieve because:
 Internal biases – what you think best for the client
automatically is the best → must have an ability to
look after the ‘ true’ needs of clients
 Changes over time – customers’ values typically evolve
either because they become more experienced or
because of the competitive offerings; Manager must not
be trapped by their historical experience of the market
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Global forces and the advertising industry.
Pages 92-95
Carry out a five forces analysis of the advertising

industry in 2015. What is the strength of the five forces

and what underlying factors drive them? What is the
industry attractiveness?
What are the changes in the industry? Which forces are

becoming more negative or positive for the major

advertising agencies?
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