Industry Analysis

Industry Analysis: Competitive Environment

The Structure-Conduct-Performance Model (Chamberlin &Robinson,1933, Bain

1959)
• A Framework that explains the connection between market structure, market
conduct and its performance.
• It postulates causal relationships between the structure of a market, the conduct
of firms in that market and economic performance.
• It has been used to provide the theoretical justification for competition policy –
developed to spot anti- competitive conditions
• It came to be used to assess the possibilities for above normal profits within an
industry
• Porter’s five forces model was developed from this economic tradition
The Structure-Conduct-Performance Model
 Michael Porter’s Five Forces Model

• The model postulates that the state of competition in an industry

is a product of competitive pressures operating in five areas of the
overall market namely:
1. Rivalry among existing competitors
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers
Michael Porter’s Five Forces Model
A

Threat
of
Entry

Rivalry
Bargaining Among Bargaining
Power of Existing Power of
Suppliers Firms Buyers

Threat
of
Substitutes
HIGHER THREAT LOWER AVERAGE PROFITS
 Steps to be followed in using the model

• One should
1. Identify the specific competitive pressures associated with each
of the five forces.
2. Evaluate the strength of the pressures comprising each of the five
forces (eg fierce, strong, moderate to normal, or weak)
3. Determine whether the collective strength of the five
competitive forces is conducive to earning attractive profits
Michael Porter’s Five Forces Model

• The analysis of the collective strength of the five -competitive

forces determine whether the industry is conducive for good
profitability.
• Generally the stronger the collective impact of the competitive
forces, the harder it becomes for industry members to earn
attractive profits.
• Furthermore, a company’s strategy is increasingly effective the
more it provides some insulation from competitive pressures and
shifts the competitive battle in the company’s favor.
Rivalry Among Existing Rivalries

• A market is regarded as a competitive battlefield where rivalry

competitors employ whatever weapons to strengthen their market
positions, attract and retain buyers and earn good profits.
• When one firm makes a strategic move that produces good results,
its rivals usually respond with offensive or defensive
countermoves.
Rivalry Among Existing Rivalries

• High rivalry means firms compete vigorously.

• Industry conditions that facilitate rivalry include:
• Large numbers of competitors and more so if rivals are of roughly
equal size and competitive capability .
• Slow or declining growth
• Low product differentiation
• Low buyer switching costs
• When competing sellers are active in making fresh moves to improve
their market standing and business performance
Threat of Entry

• This refers to the competitive pressures coming from new firms that
want to enter the industry.
• The entry of new firms in an industry is determined by the existence of
entry barriers .
• High barriers reduce the competitive threat of potential entry, while
low barriers make entry more likely.
• If firms can easily enter the industry, any above normal profits will be
eroded away quickly.
• Barriers to entry lower the threat of entry
• Barriers to entry make an industry more attractive.
Threat of entry

• Barriers to entry:
• Economies of scale – firms that cannot produce the minimum
efficient scale will be at a disadvantage.
• Product Differentiation –entrants are forced to overcome customer
loyalties to existing products
• Learning curve effects – Incubents may have learning advantages
• Government policies – Governments may impose trade restrictions
and grant monopolies
Threat of entry

• Barriers to entry Continued:

• High capital requirements
• Poor distributor/retailer network
• Tariffs and international trade restrictions
• The retaliating activities of incumbent firms
Threat of Substitutes

• Substitutes are products or services that offer a similar benefit to an industry’s

products or services, but by a different process
Eg Coke and Pepsi are rivals, milk is a substitute of both
• Substitutes will likely come from outside the industry
• Substitutes can reduce the demand for a particular product as customers switch
to the alternatives.
• They also limit the potential returns of the industry by placing a ceiling on the
prices that can be effectively be charged.
Bargaining Power of Suppliers

• Suppliers refer to those who supply the organization with what it needs to
produce the product or service.
• Competitive pressure from suppliers depend on
1. Whether the major suppliers can exercise sufficient bargaining power to
influence the terms and conditions of supply in their favor
2. How closely one or more industry members collaborate with their suppliers to
achieve supply chain efficiencies.
Bargaining Power of Suppliers

• Powerful suppliers can squeeze (lower) profits of the focal firm

• Industry conditions that facilitate supplier power:
• Small number of firms in supplier’s industry
• Highly differentiated product
• Higher buyer switching costs
• Lack of close substitutes for suppliers’ products
• Threats of forward integration by suppliers
• Focal firm is an insignificant customer of supplier
Bargaining Power of Buyers

• Buyers refer to the organization's immediate customers, not

necessarily the ultimate consumers.
• Sometimes buyers have such high bargaining power that industry
members are hard pressed to make profits at all.
• They may squeeze the profits of the focal firm by demanding
lower prices and/or higher levels of quality and service.
Bargaining Power of Buyers

• Buyer bargaining power is stronger when:

1. Buyer switching costs to competing brands or substitutes are low.
2. Buyers are large and can demand concessions when purchasing
large quantities.
3. Large volume purchases by buyers are important to sellers.
4. Buyer demand is weak or declining
5. There are only a few buyers
6. Products are not differentiated
Bargaining Power of Buyers

7. Identity of buyer adds prestige to the seller’s list of customers.

8. Quantity and quality of information available to buyers improves.
9. Buyers have the ability to postpone purchases until later if they
do not like the present deals being offered by sellers.
10. Some buyers are a threat to integrate backward into the
business of sellers and become important competitors(The
opposite is true)
M Porter’s Five Forces Model

• If all threats are high Expect normal profits

• If all threats are low Expect above normal profits
• Most industries are somewhere between the extremes

• Question
After Examining past and present forces operating in any industry of your
choice, try to predict what will happen to each of these forces in the
future and how these developments might affect the future competitive
intensity of the sector
Responding to Environmental Threats

Neutralising Threats
• Most firms cannot unilaterally change the threats in an industry
• By altering relationships in an industry, firms may reduce threats
and/or create opportunites, thereby increasing profits.
 Exploiting Industry Structure
Opportunities
Generic Market Situations or Positions
• At any point in time, the structure of most industries fits into one of four/five generic
categories namely:
• Emerging Market Situtation
• Rapid Growth Market Situation
• Mature Market Situation
• Declining Market Situation
• Fragmented Market Situation
• Each market situation presents opportunities that may be exploited
• Firms can choose to exploit a market situation’s opportunities, continue business as
usual or exit the industry
 Exploiting Industry Structure
Opportunities

Emerging Market Situation/Condition

Industry Characteristic Opportunity
• New industry based on breakthrough technologies/pdcts First mover advantages
• No product standard has been reached Technology
• No dominant firm has emerged locking up assets
• New customers come from non consumption not from competitors: Creating switching costs
Exploiting Industry Structure Opportunities

Mature Market Situation

Industry Characteristics Opportunities
• Slowing growth in demand Refine current
products
• Technology standard exists Improve service
• Increasing international competition process innovation
• Industry-wide profits declining
• Industry exiting beginning
 Exploiting Industry Structure
Opportunities
Declining Market Situation
Industry Characteristics Opportunities
• Industry sales have sustained a pattern of decline Market Leadership
• Some well established firms have exited Niche
• Firms have stopped investing in maintenance Harvest; Divest
Exploiting Industry Structure
Opportunities

Fragmented Market Situation

Industry Characteristics Opportunity
• Large number of small firms Consolidation
• No dominant firms Buy competitors
• No dominant technology Build market power
• Low barriers to entry Exploit economies of scale
• Few if any economies of scale
Critical View of Porter’s Analysis

• The action of the five forces determines the long run profitability of a
given industry
• When the five forces act favourably a great number of companies may
realise high returns on investment.
• On the other hand when one or several forces act unfavourably, profit
margins reduce and the number of profitable companies may be few.
• The intensity of these five forces depends on the structure of the industry.
• Companies can have influence on the forces, eg Pressure from new
entrants can be reduced by increasing barriers to entry.
Critical View of Porter’s Analysis

• Porter argues that businesses can, by the way they choose to compete,
influence each of the five forces.
• What they must do is search for sustainable competitive opportunities
and exploit them, which comes from developing a distinctive way of
completing.
• An advantage comes either by having consistently lower costs than rivals
or by differentiating a product/service/ segment from competitors (focus
strategies)
• The best competitors are those that have more than one key strengths
and integrate a number of business activities in a way that is ‘consistent,
interconnected and mutually reinforcing’.
Critique of Porter’s Five Forces

• The task of analysing a company’s external situation cannot be reduced

to a mechanical, formula-like exercise in which facts and figures are
plugged in and definitive conclusions drawn.
• Critics of Porter’s theories have argued that it is no longer possible for a
company to develop a sustainable competitive advantage. Companies can
only hope to develop enough flexibility to seize opportunities for
temporary advantage when they arise.
• The emphasis on industry tend to ignore a firm’s core skills and
competencies.
• There is also error in assuming that a firms resources are homogeneously
distributed and highly mobile
Summary

External analysis:
• Takes time and effort
• Should include consideration of international markets
• Helps firms to recognise threats and opportunities
• Provides assessment of likely levels of industry profitability
(normal, above,below)
• Can be applied at the individual level to professional and personal
environments