Industry Analysis

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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 3

Industry Analysis:

The Fundamentals

Introduction / Objectives
From environmental analysis to industry analysis
Analyzing industry attractiveness
Applying industry analysis to forecast industry profitability
Using industry analysis to develop strategy
Defining industries: Where to draw the boundaries
Identifying Key Success Factors

Industry Analysis: the Fundamentals

OUTLINE

To understand how industry structure drives competition, which determines the level of industry profitability.

To assess industry attractiveness

To use evidence on changes in industry structure to forecast future profitability

To formulate strategies to change industry structure to improve industry profitability

To identify Key Success Factors

The Objectives of Industry Analysis

INTRODUCTION / OBJECTIVES

THE INDUSTRY

ENVIRONMENT

Suppliers

Competitors

Customers

Social structure

The national/ international economy

Technology

Government

& Politics

The natural environment

Demographic structure

Social structure

The Macro Environment impacts the firm through its effect on the Industry Environment

At the Core of the Macro Environment is the Industry Environment

FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

Profitability of Selected US Industries (median ROCE)

ANALYZING INDUSTRY ATTRACTIVENESS

HIGH PROFITABILITY	%	LOW PROFITABILITY	%
Tobacco	59.9	Food and Drug Stores	10.2
Computer Software	29.8	Utilities: Gas and Electric	9.6
Household, Personal Care	25.2	Telecom Services	9.5
Semiconductors	22.5	Agricultural Processing	9.5
Pharmaceuticals	21.3	Petroleum	9.2
Entertainment	20.7	Insurance	9.1
Aerospace, Defense	19.9	Food Retailing	9.1
Beverages	19.2	Trucking	9.1
Chemicals, Specialty	18.2	Hotels, Casinos	9.0
Food Processing	18.0	Motor Vehicle Parts	9.0
Medical Products	17.5	Electrical Power	6.0
Engineering/Construction	16.8	Motor Vehicles	5.7
Restaurants/Catering	16.6	Airlines	5.1

3 key influences:

The value of the product to customers

The intensity of competition

Relative bargaining power at different stages of the value chain

The Determinants of Industry Profitability

ANALYZING INDUSTRY ATTRACTIVENESS

Product

Differentiation

Information

availability

Many firms

A few firms

Two firms

One firm

No barriers

Significant barriers

High barriers

Homogeneous

Product

Potential for product differentiation

Perfect

Information

Imperfect availability of information

The Spectrum of Industry Structures

Concentration

Entry and Exit

Barriers

Perfect

Competition

Oligopoly

Duopoly

Monopoly

ANALYZING INDUSTRY ATTRACTIVENESS

Porter’s Five Forces of Competition Framework

SUPPLIERS

POTENTIAL

ENTRANTS

SUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

ANALYZING INDUSTRY ATTRACTIVENESS

INDUSTRY RIVALRY

Concentration

Diversity of

competitors

Product differentiation

Excess capacity and

exit barriers

Cost conditions

THREAT OF ENTRY

Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution

channels

Legal/ regulatory barriers
Retaliation

SUBSTITUTE

COMPETITION

Buyers’ propensity

to substitute

Relative prices &

performance of

substitutes

BUYER POWER

Buyers’ price sensitivity

Relative bargaining

power

SUPPLIER POWER

Buyers’ price sensitivity

Relative bargaining

power

The Structural Determinants of Competition

ANALYZING INDUSTRY ATTRACTIVENESS

Extent of competitive pressure from producers of substitutes depends upon:

Buyers’ propensity to substitute

The price-performance characteristics of substitutes.

Threat of Substitutes

ANALYZING INDUSTRY ATTRACTIVENESS

Entrants’ threat to industry profitability depends upon the height of barriers to entry.

The principal sources of barriers to entry are:

Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to channels of distribution
Legal and regulatory barriers
Retaliation

Threat of New Entry

ANALYZING INDUSTRY ATTRACTIVENESS

Buyer’s price sensitivity

Relative bargaining power

Importance of item in relation

to buyers’ total costs.

Differentiation of the

purchased item

Intensity of competition

among buyers

Whether item is critical to the

quality of buyers’ own output

Size and concentration of

buyers relative to sellers.

Buyer’s information .

Ability to backward integrate.

NOTE: analysis of supplier

power is symmetric

Bargaining Power of Buyers

The extent to which buyers are able to depress

profitability in an industry depends upon:

ANALYZING INDUSTRY ATTRACTIVENESS

The extent to which industry profitability is depressed by aggressive price competition depends upon:

Concentration (number and size distribution of firms)

Diversity of competitors (differences in goals, costs strategies, etc.)

Product differentiation

Excess capacity and exit barriers

Cost conditions

Ratio of fixed to variable costs
Extent of scale economies

Rivalry Between Established Competitors

ANALYZING INDUSTRY ATTRACTIVENESS

Perform a Five Forces Analysis to understand why the industry’s current level of profitability is what it is

Identify the changes in industry structure that are likely to occur over the next few years. E.g.

Is new entry likely?

Will concentration increase as a result of mergers and acquisitions?

Will additions to industry capacity outpace the growth in demand?

Will innovation create new substitutes?

Use the Five Forces Framework to predict the impact of these structural changes on competition and profitability

Applying Five-Forces Analysis to Forecast Industry Profitability

APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY

Strategies to Improve Industry Profitability

Which of the structural variables that are depressing profitability can we change by individual or collective strategies?

Strategic Positioning

Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry.

Using Industry Analysis to Develop Strategy

USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY

What industry is Ferrari in?

The Motor Vehicle industry (SIC 371)
The Automobile industry (SIC 3712)
The sports car industry
Is its industry global, regional (Europe) or national (Italy)?

Key criterion: SUBSTITUTABILITY

On the demand side : are buyers willing to substitute between types of cars and across countries
On the supply side : are manufacturers able to switch production between types of cars and across countries

We may need to draw industry boundaries differently for different types of decision

Drawing Industry Boundaries

DEFINING INDUSTRIES

What drives competition?

What are the main

dimensions of competition?

How intense is competition?

How can we obtain a

superior competitive position?

Analysis of demand

Who are our

customers?

What do they want?

KEY SUCCESS FACTORS

Analysis of competition

What drives competition?
What are the main dimensions of competition?
How intense is competition?
How can we obtain a superior competitive position?

What do customers want?

How does the firm survive competition

Pre-requisites for success

Identifying Key Success Factors

IDENTIFYING KEY SUCCESS FACTORS

KSFs in Steel, Fashion Clothing, and Supermarkets

IDENTIFYING KEY SUCCESS FACTORS

WHAT DO CUSTOMERS WANT?	HOW FIRMS SURVIVE COMPETITION?	KEY SUCCESS FACTORS
Steel	Low price Product consistency Reliability of supply Specific technical specifications for special steels	Strong price competition and cyclical demand require low costs and financial strength	Cost efficiency requires either large plants in low-cost locations, or hi-tech, flexible, mini-mills close to customers Quality and service differentiation
Fashion clothing	Demand segmented by garment type, style, quality, color Price premium for brand, style, exclusivity, and quality Mass market highly price sensitive	Intensely competitive due to low entry barriers, low seller concentration, and strong retail buying power Differentiation can yield substantial price premium, but imitation rapid	Combining differentiation with low-costs Key differentiation variables: design, speedy to fashion trends, brand reputation, quality Cost efficiency requires low labor costs
Super-markets	Low prices Convenient location Wide product range adapted to local tastes Fresh produce, good service, pleasant ambience, easy parking	Markets localized Intensity of price competition depends on number and proximity of competitors Bargaining power essential to low input costs	Low-costs require operational efficiency, efficient supply chain, buying power, low wage costs. Differentiation requires wide product range (hence, large stores), convenient location, easy parking

Profitability = Yield x Load factor - Unit Cost

Income Revenue RPMs Expenses

ASMs RPMs ASMs

Price competitiveness.

Efficiency of route

planning.

Flexibility and

responsiveness.

Customer loyalty.

Meeting customer

requirements.

Wage rates.

Fuel efficiency of

planes.

Employee

productivity.

Load factors.

Administrative

overhead.

Strength of competition on routes.

Responsiveness to changing market conditions

% business travelers.

Achieving differentiation advantage

NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles

Identifying KSFs Through Modeling Profitability: The Airline Industry

IDENTIFYING KEY SUCCESS FACTORS

ROCE

Return on Sales

Sales/Capital

Employed

Sales mix of products

Avoiding markdowns through

tight inventory control

Max. buying power to minimize

cost of goods purchased

Max. sales/sq. foot through:

*location *product mix

*customer service *quality control

Max. inventory turnover through

electronic data interchange, close

vendor relationships, fast delivery

Minimize capital deployment

through outsourcing & leasing

Identifying KSFs by Analyzing Profit Drivers: Retailing

www.contemporarystrategyanalysis.com

IDENTIFYING KEY SUCCESS FACTORS

Forecasting Industry Profitability

Past profitability a poor indicator of future profitability.
If we can forecast changes in industry structure we can predict likely impact on competition and profitability.

Strategies to Improve Industry Profitability

Influencing industry structure by individual or collective strategies

Positioning the firm to shelter from the forces of competition

Defining Industry Boundaries

Key criterion: substitution

Industry definition depends upon the strategic issues being considered

Key Success Factors

Gateway to the analysis of competitive advantage

Summary

INDUSTRY ANALYSIS: THE FUNDAMENTALS

From Environmental Analysis to Industry Analysis:

The industry is the core of a firm’s external environment. Political, economic, social, and technological forces impact the firm through its industry :