Strategic Management Case Analysis

INDUSTRY ANALYSIS

One of the major competences that strategic managers need is the ability to define their business, conduct an effective industry analysis,

and identify the "key success factors" for firms competing in their industry. This brief note discusses the steps most often found in a

solid analysis of an industry.

A.DEFINE THE INDUSTRY.

The boundaries for an industry analysis are determined by the markets and products that best describe the domain of the industry. Once

you fully understand the business segment that is to be analyzed, you are in a position to identify the capabilities required to participate

successfully in that industry, and the competitors that are likewise able to effectively target the same business segments. These

elements set the parameters for understanding and analyzing the industry. As industries converge and shift, business definitions become

more difficult. In virtually all industries, consumers are becoming more demanding for customized products and services. These

demands encourage the development of innovations, products, and competitors.

B. DESCRIBE THE INDUSTRY STRUCTURE.

For each product-market segment, an industry analysis will describe the "five-forces" of competition. The five forces discussed briefly

below predict the long run profitability of an industry and are an important first step in analyzing the industry once it has been identified.

1. Bargaining Power of Buyers: This primary force comes from the customer segments that make up the markets in which firms compete. The size and importance of customers influences their power to negotiate prices and terms that reduce the overall

profitability of the industry. The sizes and types of buyers present in an industry determine their potential influence on product

development and influence the level of competition to be found in the industry.

2. Intensity of Rivalry: A second force comes from the competitors and the ways they compete. Each competitor offers a set of products and services that attempts to provide higher value to the product-market segments they address. Strategies can be

designed to provide combinations of higher performance, more fashion and features, higher quality, or lower price. Increased

rivalry always leads to price or service competition that reduces the profitability of the industry.

3. Bargaining Power of Suppliers: A third influence on the profitability of an industry comes from its suppliers. In some industries, suppliers might control critical inputs that can affect all firms’ ability to compete. Analogous to Bargaining power of Buyers,

whenever suppliers are large or few, their leverage tends to be high. Limited access to critical factors of production, equipment,

materials, or components can increase prices and accordingly limit profit potential.

4. Threat of New Entrants; a fourth force represents the ease with which a new competitor can compete for existing business in the Industry. When entry is relatively easy, profits fall rapidly as many competitors enter. Barriers to such entry often include

heavy investments in capital, equipment, and market development. Such barriers tend to bolster profits. Barriers to change in

industry structure, either from new competitors entering the industry or current competitors exiting the industry tends to

stabilize prices and thus, profits.

5. Availability of Substitutes: The fifth force represents the potential for change in product-market structure of an industry through the substitution of products or services with alternative approaches to satisfying the customers’ needs. This can readily be seen

in the case of cell phones displacing traditional telephone services in satisfying the needs of consumers. The identification of

potential substitutes and the characteristics that would cause rapid substitution will form a part of a careful industry analysis.

Price too is often a driver for substitutes, such as the use of plastics for metals in cars and in plumbing supplies. Today, the

Internet is becoming a substitute for mail service and, eventually, telephone service.

6. Prediction of the long run profitability of the industry

C. IDENTIFY KEY SUCCESS FACTORS.

Key Success Factors (KSFs) are the benchmarks that any firm in the industry must possess to stay in the game. Identification of KSFs

should come at the conclusion of your industry analysis. Please be sure to note that not all factors involved in competition in an industry

are success factors. You should consider using the KSFs you identify as a key topic in your presentation. This section should be at the

end of the industry analysis.

An industry's key success factors (KSFs) are those things that most affect industry members' ability to prosper in the marketplace-the

particular strategy elements, product attributes, resources, competencies, competitive capabilities, and business outcomes that spell the

difference between profit and loss and, ultimately, between competitive success or failure. The answers to three questions help identify

an industry's key success factors:

• On what basis do customers choose between the competing brands of sellers? What product attributes are crucial? • What resources and competitive capabilities does a seller need to have to be competitively successful? • What does it take for sellers to achieve a sustainable competitive advantage?

In the brewing industry for example, the KSFs for any major player include full utilization of brewing capacity, a strong network of

wholesale distributors (to gain access to as many retail outlets as possible); and clever advertising (to induce beer drinkers to buy a

particular brand and thereby pull beer sales through the established wholesale/retail channels).

In apparel manufacturing, the KSFs are appealing designs and color combinations (to create buyer interest) and low-cost

manufacturing efficiency (to permit attractive retail pricing and ample profit margins).

Misdiagnosing the industry factors critical to long-term competitive success greatly raises the risk of a misdirected strategy. In

contrast, a company with perceptive understanding of industry KSFs can gain sustainable competitive advantage by training its strategy

on industry KSFs and devoting its energies to being distinctively better than rivals on one or more of these factors.

Key success factors vary from industry to industry and even from time to time within the same industry as driving forces and competitive

conditions change. Only rarely does an industry have more than three or four key success factors at anyone time. Moreover, even among

these three or four, one or two usually outrank the others in importance. To compile a list of every factor that matters even a little bit

defeats the purpose of concentrating management attention on the factors truly critical to long-term competitive success.

These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the

business, (4) the resource requirements to implement competitive strategy, and other (5) technical requirements to build competitive

position.

1. Customers are looking for products that provide satisfactory value for the price they pay. Each buyer segment has requirements that shape its key success factors. These requirements can include standards for performance, durability, and ease of use. Other

requirements might relate to special features, fashion, or rapid availability.

2. Competing firms often use similar product-market strategies. Competition might be based on price, quality, or delivery. Depending on its strategic focus, each firm must develop a set of skills (competences) that allow it to perform better than their

competitors on some competitive dimension.

3. Industry regulations or standards often prescribe the minimum requirements for participation in a competitive arena. Government regulations often address issues related to the environment or consumers. Industry standards often determine technical

compatibility or process performance. Such standards can be like the Industry Standards Organization (ISO), or become ad hoc

standards set by leading competitors, such as Intel and Microsoft.

4. Resource requirements are becoming increasingly critical. The costs of doing business are higher as markets become global and economies of scale become critical for research and development, manufacturing, and marketing. Minimum investments to

achieve minimum efficient scale can now exceed $1 billion for facilities in semiconductors, papermaking, and steel production.

In certain high technology areas, human resources are becoming critical. In information technology for example, shortages of

qualified personnel are forcing firms to outsource many of their activities.

5. Technical requirements too, are key to today's competitive environment. Without access certain technologies, firms are not able to participate in many industries. This is especially important for suppliers for large firms. Some examples are component

suppliers for electronics or automobiles. As firms demand more of their suppliers, suppliers must increasingly add research and

development capabilities to remain competitive.