3 - Environment Analysis - Industry

3 – Environment analysis
Industry and sector

analysis
Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Agenda
• Industry analysis
– Defining the industry
– The competitive forces
– Complementors and network effects
– Implications of the competitive five forces
• Industry dynamics
– Industry structure
– Industry life cycle
• Competitors and markets
– Strategic groups
– Market segments
• Opportunities and threats
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Learning outcomes
• Use Porter’s competitive five forces framework to analyse
industries or sectors: rivalry, threat of entrants, substitute threats,
customer’s power and supplier power.
• On the basis of the five competitive forces and complementors and
network effects-define industry attractiveness and identify ways of
managing these.
• Understand different industry types and how industries develop
and change in industry life cycles and how to make five force
analyses dynamic through comparative industry structure analysis.
• Analyse strategic and competitor positions in terms of strategic
groups, market segments and the strategy canvas.
• Use these various concepts and techniques together with those
from Chapter 2 in order to recognise threats and opportunities in
the industry and marketplace.
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Industries, markets and sectors
An industry is a group of firms producing products and
services that are essentially the same. For example,
the automobile industry and the airline industry.
A market is a group of customers for specific products
or services that are essentially the same (e.g. the
market for luxury cars in Germany).
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the health
sector).
Industry and sector environments:
the key topics
Defining the industry
• The industry must not be defined too broadly
(too wide to be meaningful) or too narrowly
(thus excluding important competitors).
• The broader industry value chain needs to be
considered – different stages in the value chain
should be treated as separate industries.
• Industries can be analysed at different levels –
for example, different geographies, markets and
even different product or service segments
within them (e.g. airline markets).
Competitive forces:
The five forces framework
Porter’s Five Forces Framework helps identify the
attractiveness of an industry in terms of five competitive
forces:
• The threat of entry.
• The threat of substitutes.
• The bargaining power of buyers.
• The bargaining power of suppliers and.
• The extent of rivalry between competitors.
Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, copyright © 1980, 1998 by The Free Press.
All rights reserved.
Rivalry between existing competitors
Incumbents
Competitive rivals are organisations with similar
products and services aimed at the same customer
group and are direct competitors in the same
industry/market (distinct from substitutes).
The degree of rivalry depends on:
• Competitor concentration and balance.
• Industry growth rate.
• High fixed costs.
• High exit barriers.
• Low differentiation.
The threat of entry
Barriers to entry are the factors that need to be
overcome by new entrants if they are to
compete. The threat of entry is low when the
barriers to entry are high and vice versa.
The main barriers to entry are:
• Economies of scale/Experience/Network effects.
• Access to supply and distribution channels.
• Differentiation and market penetration costs.
• Legislation or government restrictions (e.g. licensing).
• Expected retaliation.
• Incumbency advantages.
Dyson’s car faces low barriers to entry but high
barriers to success
• Apple abandoned electric vehicles as too complicated. Can the vacuum-

cleaner king do better?
SIR JAMES DYSON does not lack ambition. In an e-mail to the staff of his
electrical-appliance company on September 26th he reiterated his long-
held ambition to “find a solution to the global problem of air pollution”.
His audacious scheme is to add an electric vehicle to the catalogue of
pricey vacuum cleaners, fans and hair-dryers already manufactured by the
company that he owns.
His plan to invest £2bn ($2.7bn) of his own money, split evenly between
battery technology and vehicle development, shows that the barriers to
entry in the battery-powered vehicle business are much lower than those
in the market for cars with complex internal-combustion engines. But Sir
James may find that the barriers to success are more formidable.
https://www.economist.com/news/britain/21729726-apple-abandoned-electric-vehic
les-too-complicated-can-vacuum-cleaner-king-do?cid1=cust/ddnew/email/n/n/20170
927n/owned/n/n/ddnew/n/n/n/neu/Daily_Dispatch/email&etear=dailydispatch
acedido 27 set 2017
The threat of substitutes

Substitutes are products or services that offer a
similar benefit to an industry’s products or
services, but have a different nature i.e. they are
from outside the industry.
Extra-industry effects. Substitutes come from
outside the incumbents’ industry which forces
managers to look outside their own industry to
consider more distant threats and constraints.
Customers will switch to alternatives (and thus the threat
increases) if:
•The price/performance ratio of the substitute is superior (e.g.
aluminium is more expensive than steel but it is more cost
efficient for car parts)
•The substitute benefits from an innovation that improves
customer satisfaction (e.g. high speed trains can be quicker than
airlines from city centre to city centre on short haul routes).
The bargaining power of buyers
Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers!
If buyers are powerful, then they can demand cheap prices or
product/service improvements to reduce profits.
Buyer power is likely to be high when:
• Buyers are concentrated.
• Buyers have low switching costs.
• Buyers can supply their own inputs (backward vertical integration).
• Low buyer profits (under pressure to improve profits) and the purchased
inputs have a low impact on quality (can cut costs without loss of quality).
The bargaining power of suppliers
Suppliers are those who supply what organisations
need to produce the product or service. Powerful
suppliers can reduce an organisation’s profits.
Supplier power is likely to be high when:
• The suppliers are concentrated (few of them).
• Suppliers provide a specialist or rare input.
• Switching costs are high (it is disruptive or expensive to change
suppliers).
• Suppliers can integrate forwards (e.g. low-cost airlines have
cut out the use of travel agents).
Complementors
Demand complementors:
An organisation is your complementor if it enhances
your business attractiveness to customers.
E.g. app suppliers and smartphone producers
Supply complementors:
An organisation is a complementor with respect to
suppliers if it is more attractive for a supplier to deliver
when it also supplies the other organisation.
E.g. competing airlines can be complementors with
respect to a supplier like Boeing – as Boeing may
invest more in improvements if they are supplying
both airlines.
Network effects
• Or network externalities
• 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
• Eg: Marketplaces
• Network effects can make an industry
attractive as entrants and rivals can’t compete
with other companies’ larger networks
Strategic lock-in
Strategic lock-in is where users become
dependent on a supplier and are unable to use
another supplier without substantial switching
costs.
E.g. customers that bought music on Apple’s
iTunes store could initially only play it on Apple’s
own iPod players.
Sometimes companies are so successful that they
create an industry standard under their own
control (e.g. Microsoft’s Windows).
Implications of the five forces analysis
• Which industries/markets to enter or leave? – it
helps identify the attractiveness of industries.
• How can the five forces be managed? Identify
strategies that can influence the impact of the five
forces. E.g. building barriers to entry by becoming
more vertically integrated.
• How are competitors affected differently?E.g.
large firms can deal with barriers to entry more
easily than small firms.
Issues in five forces analysis
• Defining the ‘right’ industry. Applying the model at the
most appropriate level – not necessarily the whole
industry.
Ex. the European low-cost airline industry rather than airlines
globally.
• Converging industries – particularly in the high tech arenas
– where industries overlap
Ex. digital industries – mobile phones/cameras/mp3 players).
• Complementary organisations – which enhance the
attractiveness of a business to customers or suppliers.
Microsoft Windows and McAfee computer security systems
are complementors. This can almost be considered as a
sixth force.
Steps in an industry analysis
There are several important steps in an industry analysis before
and after analysing the five forces:
•Define the industry clearly.
•Identify the actors of each of the five forces and any different
groups within them and the basis for this.
•Determine the underlying factors of, and the total strength of,
each force.
•Assess the overall industry structure and attractiveness.
•Assess recent and expected future changes for each force.
•Determine how to position your business in relation to each of
the five forces.
Industry structure
• Emerging
• Fragmented
• Concentrated
• Declining
Concentration in banking industry
Expresso, 18 de Março de 2006

Unilabs soma 22 compras e já fatura 130
milhões
A multinacional Unilabs, que entrou em Portugal em 2006,
adquiriu há ano e meio a Base Holding, até então a empresa
líder em diagnóstico clínico integrado, e acaba de fechar a sua
22.ª compra no nosso país – o grupo IMAG, que detém 12
centros de imagiologia (11 março 2019)
https://www.jornaldenegocios.pt/economia/saude/detalhe/unilabs-soma-
22-compras-e-ja-fatura-130-milhoes
Industry types
Industry types
• Monopoly industries – an industry with one firm and
therefore no competitive rivalry. A firm has ‘monopoly
power’ if it has a dominant position in the market.
• Ex: Google in the US search engine market.
• Oligopoly industries – an industry dominated by a few

firms with limited rivalry and in which firms have
power over buyers and suppliers.
• Ex: Boeing and Airbus dominate the market for civil
aircraft.
Industry types
• Perfectly competitive industries – where barriers to
entry are low, there are many equal rivals each with
very similar products, and information about
competitors is freely available. Few markets are ‘perfect’
but many may have features of highly competitive
markets, for example, mini-cabs in London.
• Hypercompetitive industries – where the frequency,

boldness and aggression of competitor interactions
accelerate to create a condition of constant
disequilibrium and change (e.g. mobile phones).
The industry life cycle
•O PRINCÍPIO DO FIM DO GOLF
•Ao fim de 30 anos, as vendas do VW Golf estão em crise na Europa,
arrastando a Volkswagen para uma quebra de 5% nos lucros.
•Expresso, 28 de Fevereiro 2004
Comparative industry structure analysis
Competitors and markets
• An industry or sector maybe too high a level

to allow a detailed analysis of competition
• Ex: Porsche and Kia
Strategic groups
Strategic groups are organisations within an industry or
sector with similar strategic characteristics, following
similar strategies or competing on similar bases.
• These characteristics are different from those in other
strategic groups in the same industry or sector.
• There are many different characteristics that
distinguish between strategic groups.
• Strategic groups can be mapped on to two-
dimensional charts (maps). These can be useful
tools of analysis.
Some characteristics for identifying
strategic groups
Strategic groups in the Indian
pharmaceutical industry
Source: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International Management,
vol. 13 (2009), pp. 338–55.
Uses of strategic group analysis
• Understanding competition – enables focus on direct
competitors within a strategic group, rather than the
whole industry. (E.g. Tesco will focus on Sainsburys
and Asda.)
• Analysis of strategic opportunities – helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ – i.e. obstacles to
movement from one strategic group to another.
These barriers can be overcome to enter more
attractive groups. Barriers can be built to defend an
attractive position in a strategic group.
Market segments
A market segment 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 called ‘niches’.
• Customer needs vary. Focusing on customer needs that are
highly distinctive is one means of building a secure
segment strategy.
• Customer needs vary for a variety of reasons – these
factors can be used to identify distinct market segments.
• Not all segments are attractive or viable market opportunities
– evaluation is essential.
Some bases of market segmentation
Market segments
Two issues are particularly important in market
segment analysis:
•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.
•Specialisation within a market segment can also
be an important basis for a successful segmentation
strategy. This is sometimes called a ‘niche
strategy’.
Benefit segmentation of the toothpaste market
Source: Adapted from Russell J. Haley, ‘Benefit segmentation: a decision-oriented research tool’,
Journal of Marketing (July 1968), pp. 30–5; see also Haley, ‘Benefit segmentation: backwards and
forwards’, Journal of Advertising Research (February–March 1984), pp. 19–25; and Haley, ‘Benefit
segmentation – 20 years later’, Journal of Consumer Marketing, 1 (1984), pp. 5–14.
https://www2.deloitte.com/us/en/insights/industry/health-care/healthcare-
consumer-patient-segmentation.html
Critical success factors (CSFs)
Critical success factors are those factors that are
either particularly valued by customers or which
provide a significant advantage in terms of cost.
•Critical success factors are likely to be an important
source of competitive advantage if an organisation has
them (or a disadvantage if an organisation lacks them).
•Different industries and markets will have different
critical success factors (e.g. in low-cost airlines the CSFs
will be punctuality and value for money whereas in full-
service airlines it is all about quality of service).
Blue Ocean thinking
• ‘Blue Oceans’ are new market spaces where
competition is minimised.
• ‘Red Oceans’ are where industries are already well
defined and rivalry is intense.
• Blue Ocean thinking encourages entrepreneurs and
managers to be different by finding or creating
market spaces that are not currently being served.
• A ‘strategy canvas’ compares competitors according
to their performance in order to establish the extent
of differentiation.
Strategy canvas
Note: cost is used rather than price for consistency of value curves.
Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, Harvard Business School Press, 2005.
Opportunities and threats
The critical issue in undertaking
environmental analysis is the implications
that are drawn from this understanding in
guiding strategic decisions and choices.
Identifying opportunities and threats is
extremely valuable when thinking about
strategic choices.
Opportunities and threats form one half of the
SWOT analysis that shapes strategy.
Summary
• The environment influence closest to an organisation includes the industry
or sector
• Industries and sectors can be analysed in terms of Porter’s five forces –
barriers to entry, substitutes, buyer power, supplier power and rivalry.
Together with complementors and network effects, these determine
industry or sector attractiveness and possible ways of managing strategy.
• Industries and sectors are dynamic, and their changes can be analysed in
terms of the industry life cycle and comparative five forces radar plots.
• Within industries strategic group analysis and market segment analysis
can help identify strategic gaps or opportunities
• Blue Ocean strategies are a means of avoiding Red Oceans with many
similar rivals and low profitability and can be analysed with a strategy
canvas.

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3 – Environment analysis

Industry and sector

Always check text with grammarly

• Apple abandoned electric vehicles as too complicated. Can the vacuum-

The threat of substitutes

Expresso, 18 de Março de 2006

• Oligopoly industries – an industry dominated by a few

• Hypercompetitive industries – where the frequency,

•Expresso, 28 de Fevereiro 2004

• An industry or sector maybe too high a level

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